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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
BAKER, FENTRESS & COMPANY
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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[On BKF Letterhead]
July __, 1999
To Our Fellow Shareholders:
Baker, Fentress & Company will hold a Special Meeting of Shareholders on
August 19, 1999 in Chicago. The purpose of the meeting is to give you the chance
to vote on the proposed Plan For Distribution of Assets of Baker, Fentress &
Company. The accompanying proxy statement provides a detailed discussion of the
Plan and the proposed changes to the Company. Please read it carefully before
you vote your shares. This list of questions and answers is meant to provide you
a helpful summary of some of the information contained in the proxy statement.
Q: WHY IS THE COMPANY SENDING ME A PROXY STATEMENT?
All investment companies are required to obtain shareholders' approval for
certain types of changes. As a shareholder, you have the right to vote on major
policy decisions, such as those included in the Plan. The proxy statement
explains the changes contemplated by the proposed Plan, why the Board believes
the Plan is appropriate and in the best interests of shareholders and what will
happen to the Company if shareholders approve the Plan.
Q: WHAT AM I BEING ASKED TO VOTE ON AT THE MEETING?
The Company is asking shareholders to approve the Plan. If shareholders
approve the Plan, the Company will:
. sell all the Company's publicly-traded securities and all or most of
the Company's private placement securities and distribute the proceeds
(less incurred and anticipated expenses of the Plan) to the Company's
shareholders;
. distribute the Company's shares of Consolidated-Tomoka Land Co. to the
Company's shareholders; and
. deregister as an investment company under the Investment Company Act
of 1940 after the asset distributions are complete, and become an
operating company with its sole asset being its investment in the John
A. Levin & Co. Inc., the indirect, wholly-owned subsidiary of the
Company and the investment adviser to the Company's public portfolio,
and its affiliated companies.
The Company is also asking shareholders to approve a reverse stock split of
the Company's common stock to effect an increase in the per share price of the
Company's stock after the Company completes the proposed distribution of most of
its assets.
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Q: WHY IS THE BOARD RECOMMENDING THIS COURSE OF ACTION?
The Board believes the Plan is an effective way to maximize shareholder
value and is in the best interests of the Company's shareholders.
Q: HAS THERE BEEN ANY CHANGE IN HOW THE COMPANY'S INVESTMENTS HAVE BEEN
MANAGED AS A RESULT OF THE BOARD'S ADOPTION OF THE PLAN?
No. The Company and John A. Levin & Co., Inc. have been managing the
Company's investments in the same fashion as they did prior to the Board's
adoption of the Plan.
Q: WHEN WILL THE PLAN TAKE EFFECT?
The Plan will become effective immediately after the Company's shareholders
approve the Plan, although the Company will not complete implementing the Plan
for several months. Until the Plan has been completely implemented, the Board
has the power to change or modify the Plan if it concludes that doing so will be
in the best interests of the Company and its shareholders.
Q: WHEN WILL THE COMPANY PAY THE DISTRIBUTIONS CONTEMPLATED UNDER THE PLAN?
The Company believes that it will make a distribution from realized capital
gains on September 24, 1999, which will occur at the same time the Company
distributes its CTO Shares to shareholders. The Company plans to distribute the
balance of the net cash proceeds in one or two additional distributions. If the
Company decides to make one additional distribution, the Company believes it
will be on January 7, 2000. However, if the Company decides to make two
additional distributions, the Company believes the second distribution will
occur in late December 1999, with a final distribution on January 7, 2000. These
dates are tentative and the Board may change them. Please refer to pages 15 and
16 of the attached proxy statement for a full description of the proposed
distributions.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE PLAN?
There are a variety of tax consequences that will result if the
shareholders approve the Plan and transactions contemplated under the Plan. We
strongly urge you to carefully review all of these tax consequences, which are
described in the attached proxy statement. We also suggest that you consult
Appendix E in the Proxy Statement, which provides shareholders with some
examples of the financial and tax results of the Plan.
Q: WILL THE PLAN CHANGE THE COMPANY'S CURRENT DISTRIBUTION POLICY?
2
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Yes. The distributions described in the previous question will be a
significant portion of the Company's net assets and will be well over the 8%
minimum level; however, the 8% distribution policy will no longer be in effect
after completion of the Plan.
Q: WHAT SECURITIES WILL I BE LEFT WITH AFTER THE DISTRIBUTIONS UNDER THE
PROPOSED PLAN ARE COMPLETED?
After the various cash distributions described above, you will own a pro
rata share of the common stock of CTO shares distributed as part of the Plan.
In addition, you will be left with a pro rata share of the Company, whose only
asset will be an investment in John A. Levin & Co., Inc. and its affiliated
companies.
Q: WHY NOT CONVERT THE COMPANY INTO AN OPEN-END FUND?
Although the Board considered converting the Company into an open-end fund,
the Board rejected this course of action because the Company's asset composition
would make compliance with the regulatory requirements applicable to open-end
companies difficult or impossible, and because the Board anticipated that the
level of redemptions immediately following open-ending likely would be quite
high, which could significantly disadvantage shareholders who chose not to
redeem.
Q: HOW DO THE DIRECTORS RECOMMEND THAT I VOTE?
The directors recommend that you vote "For" (in favor of) these proposals.
Q: WHAT IF I HAVE QUESTIONS?
If you have questions about the Plan, or anything else in the proxy
statement, you may call the Company at 1-800-BKF-1891, or Corporate Investor
Communications, Inc. at 1-201-896-1900.
James P. Gorter John A. Levin
Chairman of the Board President
3
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Baker, Fentress & Company
Established 1891
200 WEST MADISON STREET . CHICAGO, ILLINOIS 60606 . (800) BKF-1891
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on August 19, 1999
Fellow Shareholders:
A special meeting of the shareholders of Baker, Fentress & Company, a
Delaware corporation (the "Company"), will be held at the Chicago Hilton and
Towers, 720 South Michigan Avenue, Chicago, IL 60605, on Thursday, August 19,
1999, at 10:30 a.m., Chicago time, for the following purposes:
1. To approve the Plan For Distribution of Assets of Baker, Fentress
& Company pursuant to which the Company will distribute or
liquidate substantially all of its assets, with the exception of
Levin Management Co., Inc. and its subsidiaries, and change the
nature of the Company's business so that it will cease to be a
registered investment company;
2. To amend the Company's Certificate of Incorporation to provide
for a reverse stock split of shares of the Company's common
stock; and
3. To transact such other business as may properly come before the
meeting or any adjournment.
Shareholders of record at the close of business on June 30, 1999, the
record date for this proxy solicitation, are entitled to notice of and to vote
at the Special Meeting, or at any postponements or adjournments of that meeting.
By Order of the Board of Directors
James P. Koeneman
Secretary
Chicago, Illinois
July __, 1999
Please indicate your voting instructions and whether you will be attending the
meeting in person on the enclosed proxy card, date and sign, and return it in
the enclosed envelope. Please mail your proxy card promptly to help save the
cost of additional solicitations.
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TABLE OF CONTENTS
<TABLE>
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Page
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APPROVAL OF THE PLAN FOR DISTRIBUTION OF ASSETS OF BAKER,
FENTRESS & COMPANY...................................................................................... 1
Background of the Company............................................................................... 2
Why the Board is Recommending the Plan.................................................................. 6
Lazard Freres' Analysis and Opinion................................................................ 8
Conclusion......................................................................................... 14
Summary of the Plan..................................................................................... 14
Plan Description................................................................................... 14
Liquidation of Private and Public Portfolios and Distribution of Proceeds.......................... 15
Distribution of CTO Shares......................................................................... 16
Deregistration as Investment Company............................................................... 19
Structure of the Company After the Distributions........................................................ 20
The Levco Companies................................................................................ 20
Levco's Clients.................................................................................... 21
Financial Information about the Levco Companies.................................................... 23
Levco's Contractual Arrangements................................................................... 25
Levco's Directors and Officers..................................................................... 25
Levco's Employees.................................................................................. 26
Levco's Properties................................................................................. 26
Changes that Will Result from Implementing the Plan..................................................... 27
Federal Income Tax Consequences......................................................................... 28
Risk Factors Relating to The Consummation of the
Transactions Contemplated by the Plan.................................................................. 33
Trading of Company Shares After the Distribution................................................... 33
Dependence on Key Personnel........................................................................ 34
Potential Adverse Effects on the Company's Performance
Prospects from a Decline in the Performance of the
Securities Markets................................................................................ 35
Future Investment Performance...................................................................... 35
Loss of Significant Accounts....................................................................... 37
Levco's Fees and Investment Contracts.............................................................. 37
Competition........................................................................................ 37
Dependence on Information Systems; Year 2000....................................................... 38
Conflicts of Interest.............................................................................. 39
Regulation......................................................................................... 39
Certain Legal Requirements......................................................................... 40
Plan Effective Date; Modification of Plan; Shareholder Approval......................................... 40
Recommendation.......................................................................................... 40
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF
BAKER, FENTRESS & COMPANY............................................................................... 41
General................................................................................................. 41
Reasons for the Reverse Stock Split..................................................................... 41
</TABLE>
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<TABLE>
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Principal Effects of the Reverse Stock Split........................................................... 43
Exchange of Stock Certificates and Elimination of Fractional Share Interests........................... 44
Federal Income Tax Consequences........................................................................ 45
Recommendation......................................................................................... 46
OTHER MATTERS............................................................................................... 46
INTERESTS IN STOCK.......................................................................................... 46
EXECUTIVE OFFICERS.......................................................................................... 48
COMPENSATION................................................................................................ 48
Incentive Compensation Plan............................................................................ 48
Directors' Compensation................................................................................ 49
Officers' Compensation - Summary Table................................................................. 51
Employment Contracts................................................................................... 52
Pension Plan........................................................................................... 52
Compensation Committee Report on Executive Compensation................................................ 53
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS............................................................ 54
PROXY SOLICITATION; VOTING; ADJOURNMENT..................................................................... 55
AVAILABLE INFORMATION....................................................................................... 57
APPENDIX:
A. Plan For Distribution of Assets of Baker, Fentress & Company........................................... A-1
B. Lazard Freres & Co. LLC Opinion........................................................................ B-1
C. Levin Management Co., Inc. Consolidated Financial Statements........................................... C-1
D. Condensed Pro Forma Consolidated Financial Information................................................. D-1
E. Examples of Financial and Tax Results.................................................................. E-1
F. Proposed Amendment to the Certificate of Incorporation................................................. F-1
</TABLE>
ii
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BAKER, FENTRESS & COMPANY
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
August 19, 1999
PROXY STATEMENT
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The Board of Directors of the Company is soliciting proxies from
shareholders for use at the Special Meeting of shareholders that will be held on
August 19, 1999 and at any adjournment of that meeting.
This proxy statement describes each of the matters on which the Board is
asking you to vote. The Board recommends that you vote in favor of each of these
proposals.
APPROVAL OF THE PLAN FOR DISTRIBUTION OF ASSETS OF
BAKER, FENTRESS & COMPANY
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We are asking you to vote to approve the Plan For Distribution of Assets of
Baker, Fentress & Company (called the "Plan" in this proxy statement), by which
the Company will -
. distribute the Company's shares of Consolidated-Tomoka Land Co. to the
Company's shareholders;
. sell all the Company's publicly-traded securities and all or most of
the Company's private placement securities and distribute the proceeds
(less incurred and anticipated expenses of the Plan) to the Company's
shareholders; and
. continue in business as a holding company (not an investment company)
that owns Levin Management Co., Inc. and its subsidiaries.
The Board believes the Plan is in the best interests of shareholders. This
proxy statement explains how the Plan will work and the consequences of
implementing the Plan.
If shareholders approve the Plan (and you continue to own your Company
shares through the record dates of all anticipated distributions), you will
receive cash and shares of Consolidated-Tomoka Land Co. These distributions will
be taxable to
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you. Information about the Plan's tax consequences appears later in this proxy
statement under the heading "FEDERAL INCOME TAX Consequences".
If you have questions about the Plan, or anything else in this proxy
statement, you may call the Company at 1-800-BKF-1891, or Corporate Investor
Communications, Inc. at 1-201-896-1900.
Background of the Company
An understanding of the Company's history, including how it invested in the
past and how it came to acquire John A. Levin & Co., Inc. (called Levco, and
with its parent, Levin Management Co., Inc., and affiliated companies called the
Levco Companies, in this proxy statement), will assist you in understanding the
Plan and the Board's reasons for approving the Plan. The Company is a closed-end
management investment company. The Company began doing business in 1891 and the
present Company was incorporated under the laws of Delaware in 1954. The Company
conducted business as an investment banker and a broker-dealer in securities
until 1960, when it became a private investment company.
Since 1960, the Company's principal business has been the ownership and
management of its investment portfolio, consisting predominantly of equity
securities, both publicly-traded and privately-held. In 1970, the Company
registered as an investment company under the Investment Company Act of 1940.
The Company's shares trade under the symbol "BKF" on the New York Stock Exchange
(the "NYSE"), and will continue to trade under "BKF" if shareholders approve the
Plan. In this proxy statement, the Company's shares of common stock are referred
to as Company Shares.
The Company's investment objective is total return with an emphasis on
capital appreciation. The Company is non-diversified, meaning that the Company
is not required to, nor does it, limit the amount of assets it invests in the
securities of one or more companies. Unlike most investment companies, the
Company also invests for the purpose of controlling and managing portfolio
companies (like Consolidated-Tomoka Land Co., which is called CTO in this proxy
statement, and Levco). For internal management purposes, the Company has divided
its investment portfolio into four segments:
. a diversified portfolio of investments in publicly-traded,
predominately large-cap companies with a focus on long-term
appreciation and capital preservation;
. investments in private placement securities generally acquired
directly from issuing companies;
. Levco, which manages the Company's public portfolio, and the other
Levco Companies; and
. a 78.5% interest in CTO.
WHY THE BOARD IS RECOMMENDING THE PLAN
2
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The Company's investment portfolio is ordinarily substantially fully invested in
common stocks and other equity-related securities such as preferred stock, debt
securities convertible into, or, for private placements, accompanied by options
or warrants to purchase, equity securities, and stock-index options and stock-
index futures.
Until the Company's acquisition of the Levco Companies in 1996, the
Company's officers managed the Company's investments under the supervision of
the Board, without an investment adviser. Since June 1996, Levco has managed the
Company's public portfolio and the Company's officers have continued to manage
the other investments.
The Company generally provides shareholders with two measures of past
performance - stockholder return and portfolio performance. Stockholder return
is the actual return you, as a shareholder, would have achieved assuming
reinvestment of all distributions at the actual reinvestment price on the
payment date of the distribution and is based on the market value of the Company
Shares. The Company deducts expenses in the calculation of stockholder return.
The Company's stockholder return for the year ended December 31, 1998, and for
the 3-, 5- and 10-year periods ended December 31, 1998 was 3.5%, 14.4%, 13.0%,
and 12.0%, respectively. Stockholder return for the five-month period ended May
31, 1999 (which included the period after the Company announced the proposed
Plan) was 21.1%.
The Company also provides shareholders with information about portfolio
performance. Portfolio performance is the time weighted total return of the
Company's net assets. This total return calculation assumes monthly compounding
of total net assets, with purchases and sales of portfolio securities assumed to
occur at mid-month. Dividend income is treated as earned on the ex-date and
interest income is accrued monthly. Calculations reflect adjustments for capital
gain distributions, treasury stock purchases and taxes paid by the Company in
years when a portion of net realized capital was retained, but before deduction
of expenses. The Company's total return based on net asset value for the year
ended December 31, 1998 was 10.9%. The Company's average annual compounded total
return based on net asset value for the 3-, 5- and 10-year periods ended
December 31, 1998 was 15.3%, 14.9% and 12.1%, respectively, and its total return
for the five-month period ended May 31, 1999 was 7.0%.
Set forth below is a short description of each sector of the Company's
investment portfolio:
Public portfolio. The Company's investments in publicly-traded securities
(which predominantly are in large-cap companies), emphasize high quality, long-
term holdings. In managing the Company's public portfolio, Levco seeks total
return through capital appreciation and asset protection.
As of May 31, 1999, the Company's public portfolio was comprised of
securities of 94 issuers, having a total market value of $548 million and
representing 68% of the Company's total investment portfolio.
WHY THE BOARD IS RECOMMENDING THE PLAN
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Private Portfolio. In the past, the Company had acquired private placement
securities directly from issuing companies, under negotiated terms and
conditions. Typically, the Company invested $8 to $10 million per transaction
(although the Company sometimes made larger or smaller investments) in
established companies with strong businesses, proven managements and positive
cash flows. The types of investments the Company made are sometimes called
mezzanine level financing. This is a form of investing done with the expectation
that, if the investment is successful, the portfolio company would offer its
securities publicly or would itself be sold, or there would be some other event
that would allow the Company to sell its interest. These types of investments
have the potential for high returns, but generally involve greater risks than
investing in the types of securities that comprise the public portfolio.
In 1997, the Company announced its decision not to pursue further private
investment opportunities. The Company made this decision because it concluded
that the market had been flooded with new capital during the preceding two years
and that intense competition for mezzanine level transactions had driven up the
prices for these opportunities. Due to the risk and illiquidity of these
investments, and the market conditions, the Board made the decision not to make
additional private placement investments. As the remaining private placement
investments have matured, the Company has invested the proceeds in publicly-
traded securities.
Three former private placement securities, Citadel Communications
Corporation, Paracelsus Healthcare Corporation, and Security Capital U.S.
Realty, currently are publicly traded. As of May 31, 1999, these three
securities had a total market value of $60 million. These securities are
included in the valuation of the Company's public portfolio; however, because
the Company originally held them in its private portfolio, the Company does not
take these securities into account in the calculation of Levco's fee for
managing the public portfolio.
As of May 31, 1999, the Company's private placement portfolio consisted of
equity and equity-related securities of 4 issuers, having a total fair value (as
determined by the Board) of $11 million and representing 1% of the Company's
total investment portfolio. The Board has determined in good faith that the
valuations of the securities in the private placement portfolio are fair. The
Board has based its determination of fair value on factors the Board deems
relevant. For more information on the factors the Board considers in making its
determination, see "Levco Companies" below.
Levco Companies. The Company acquired Levco in June 1996 as a vehicle
through which the Company believed it could develop a broader financial services
business. As part of the acquisition, the Company formed Levin Management Co.,
Inc. (called Levin Management in this proxy statement) to provide administrative
and management services to Levco and its related companies. The Company owns
100% of Levin Management, which in turn owns 100% of Levco. Levco is a
registered investment adviser that, as part of its regular investment management
business, manages the Company's public portfolio. Levco owns 100% of Levco GP,
Inc., which is
WHY THE BOARD IS RECOMMENDING THE PLAN
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the general partner of several investment partnerships managed by Levco, and
LEVCO Securities, Inc., a registered broker-dealer. More information about the
business of the Levco Companies is provided later under the heading "STRUCTURE
OF THE COMPANY AFTER THE DISTRIBUTION - The Levco Companies".
As of May 31, 1999, the Board determined in good faith that the fair value
of the Company's investment in the Levco Companies was $115 million. The Company
valued the Levco Companies at $116 million on the date the merger agreement
between the Company and the predecessor to the Levco Companies was signed and at
$131.1 million at the acquisition date in June 1996. The Company loaned Levin
Management $65 million in connection with the acquisition and has received
approximately $18.9 million in interest income from Levin Management from June
1996 through May 31, 1999. The notes for this loan originally were due on June
28, 1999 and carried an initial interest rate of 9.75% that was raised to 10.25%
for the period from November 1, 1998 through June 15, 1999. The Company
subsequently extended this loan through December 31, 1999, at an interest rate
of LIBOR plus 350 basis points. See "STRUCTURE OF THE COMPANY AFTER THE
DISTRIBUTIONS - The Levco Companies" for information about how the Company
expects to handle this loan in connection with the Plan.
In valuing the Levco Companies or any other security for which market
quotations are not readily available, the quantitative and qualitative factors
that the Board considers may include:
. the type of the security and the nature of the company's
business;
. the security's marketability and restrictions on its disposition;
. the market price of unrestricted securities of the same issuer
(if any), comparative valuation of securities of publicly traded
companies in the same or similar industries, and the valuation of
recent mergers and acquisitions of similar companies;
. the current financial condition and operating results, sales and
earnings growth, and operating revenues of the company; and
. competitive conditions and current and prospective conditions in
the overall stock market.
The value the Board determines may not reflect amounts that the Company could
realize upon immediate sale, nor the amounts that the Company ultimately may
realize, and may differ from the value that the Company would have used had a
ready market existed for the security. Such differences could be significant.
CTO. The Company owns 78.5% of the outstanding common stock of CTO (called
the "CTO Shares" in this proxy statement), which is listed on the American Stock
Exchange (the "AMEX"). CTO's primary operating business is real estate
development. As of May 31, 1999, the Company's investment in CTO had a value of
$76 million
WHY THE BOARD IS RECOMMENDING THE PLAN
5
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(based on the closing price of CTO's common stock on the AMEX that day) and
represented 9% of the Company's total investment portfolio. See "SUMMARY OF THE
PLAN - Distribution of CTO Shares" below for a more complete description of CTO.
Why the Board is Recommending the Plan
In 1998, the Board established a strategic planning committee of the Board.
At that time, the members of the strategic planning committee were Jessica M.
Bibliowicz (who resigned from Levco and as a member of the Board on April 7,
1999 for reasons unrelated to the transactions contemplated by the Plan), Eugene
V. Fife, J. Barton Goodwin, James P. Gorter, David D. Grumhaus, John A. Levin,
Burton G. Malkiel and Dean J. Takahashi. The committee commenced its strategic
planning process by focusing on plans to grow the Company's financial services
business through Levco. However, the process evolved into exploring the
strategic alternatives that might be available to the Company for all of its
assets and operations.
In January 1999, the Company retained Lazard Freres & Co. LLC to provide
advice to the Board and to develop a series of strategic alternatives for all of
the Company's assets and operations. Lazard Freres presented the results of its
study to the strategic planning committee on February 11, 1999. In its
presentation, representatives of Lazard Freres noted that the Company's common
stock has historically traded at a larger, more persistent discount than the
common stock of many other closed-end equity funds. Lazard Freres reported to
the Board that it believed that, for the Company to reduce the discount and
enhance shareholder value, the Company would have to address three issues:
. the composition of the Company's portfolio of investments and
valuation concerns relating to large, controlling positions in
portfolio companies;
. the potential value of the Levco Companies, taking into account the
desirability of expanding Levco's business; and
. the Company's investment in CTO.
Lazard Freres then presented the strategic alternatives available to the
Company, but noted that these alternatives were not an exhaustive list of all
the possible courses of action, but were alternatives that, based on business
rationale, qualitative factors, legal and regulatory issues, and financial
impact, the Company might reasonably expect to complete. The alternatives
included various combination and separation transactions of the Company's
affiliates, as well as the proposal to liquidate the Company's portfolio of
publicly-traded and private placement securities, distribute the proceeds to the
Company's shareholders and relinquish the Company's status as an investment
company. The committee discussed the potential benefits and disadvantages to the
Company's shareholders of each alternative Lazard Freres had presented and also
discussed additional possibilities, including converting the Company to an open-
end investment company.
WHY THE BOARD IS RECOMMENDING THE PLAN
6
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On February 24, 1999, the Board met to discuss the strategic alternatives
that Lazard Freres had proposed. The Board discussed the pros and cons of each
alternative, including particularly the alternative that became the Plan. As
part of their discussion, the Board specifically considered shareholder reaction
to the Plan, the viability of the Company after the consummation of the Plan,
the economic (including tax-related) effects on the Company and its shareholders
and other relevant factors. The directors discussed how the Company could
accomplish the series of transactions contemplated by the Plan and reviewed a
preliminary analysis of the magnitude of the distributions that the Company
might make to shareholders.
At the meeting, the Board also considered and rejected the possibility of
converting the Company to an open-end investment company. The Board determined
that conversion to an open-end format was not appropriate because the Company's
asset composition would make compliance with the regulatory requirements
applicable to open-end companies difficult or impossible, and because the Board
anticipated that the level of redemptions immediately following open-ending
likely would be quite high, which could significantly disadvantage shareholders
who chose not to redeem.
Finally, the Board discussed a number of other potential steps the Company
might take, including increasing the frequency of dividends paid by the Company,
implementing a focused public and investor relations program, and commencing a
stock buyback program.
The Board met again on April 22, 1999. After reviewing the strategic
alternatives available to the Company, the Board preliminarily determined that
the Plan was in the best interests of the Company's shareholders because it had
the greatest likelihood of maximizing shareholder value. Because of the
complexity of the proposed Plan, the Board asked its advisors to prepare a
detailed timetable and a summary of the actions that the Company would have to
take and an analysis of the questions that the Company would have to address if
the Board chose to pursue those transactions. The Board further requested that
the Company's advisors present the Board with historical performance and other
analytical information on the Company, detailed information on the Levco
Companies, and a financial analysis of the Company upon completion of the Plan.
At a special meeting of the Board held on May 6, 1999, the Company's
advisors presented historical information to the Board about the Company,
including detailed performance and discount information. Because the Levco
Companies would be the Company's principal asset upon consummation of the Plan,
the Board reviewed information about Levco and its related companies, including
information related to Levco's assets under management, Levco's investment
performance and a variety of statistical and other data on Levin Management's
consolidated financial condition. The Board also considered an analysis of the
Company's ability to sell the Company's portfolio of publicly-traded securities
and private securities as part of the Plan and reviewed a proposed outline of
the mechanics of the Plan.
WHY THE BOARD IS RECOMMENDING THE PLAN
7
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In addition, the Board considered information about CTO, particularly
information relating to the historical market price and volume of trading in CTO
Shares. Bob D. Allen, who is the chairman, president and chief executive officer
of CTO, as well as a director of the Company, advised the directors that the CTO
board had met on the afternoon of May 5, 1999 and that Mr. Gorter had
confidentially advised the CTO board of the possibility that the Company might
distribute the Company's CTO Shares to the Company's shareholders. Mr. Allen
stated that the CTO board had concluded that this would be a positive
development for CTO and its other shareholders, and that the CTO board was
continuing to consider implementing a self-tender offer or other stock buyback
program which, if approved by the CTO board, would take place after the Company
completed the distribution of CTO Shares.
On June 17, 1999, the Board met and approved the Plan in the form attached
hereto as Appendix A and the amendment to the Company's Certificate of
Incorporation needed to effect the reverse stock split in the form attached
hereto as Appendix F, and directed that they be submitted to the Company's
shareholders.
Prior to approving the Plan, the Board reviewed, among other things, a
detailed analysis of the material differences in the tax consequences to the
Company's shareholders of adopting a plan of partial liquidation (as
contemplated by the Plan) versus the tax consequences to shareholders of
adopting a plan of complete liquidation of the Company. Under a complete
liquidation, all of the Company's assets, including the shares of the Levco
Companies owned by the Company, would be distributed to the Company's
shareholders. The Board's analyses included estimates of the after-tax outcomes
to shareholders under each type of liquidation plan that could result from the
interaction between the tax consequences of such plan and a particular
shareholder's basis in his Company Shares, the shareholder's effective tax rate
on ordinary income, and the period during which the shareholder retains his
Company Shares after the liquidation. In reviewing such analyses, the Board was
advised of the relative tax effects of each type of liquidation plan on certain
members of the Board.
After considering these matters, the Board unanimously concluded that
maintaining the Plan as a plan of partial liquidation was advisable and in the
best interests of the Company's shareholders. In reaching this conclusion, the
Board determined that it could not obtain all of the information necessary to
fully assess the tax consequences of a partial liquidation versus a complete
liquidation on all shareholders, including information concerning each
shareholder's taxable status, tax basis in its Company Shares, effective tax
rate on ordinary income, and intentions with respect to the long-term holding of
the Company Shares. In light of both the unavailability of information and the
absence of an objectively demonstrable advantage associated with a partial or a
complete liquidation for all shareholders under all sets of assumptions, the
Board determined that it was appropriate to give considerable weight to several
other matters implicated by the choice of a partial liquidation versus a
complete liquidation, including the following: (i) a delay would be occasioned
by changing the Plan to a plan of complete liquidation as a result of additional
or different regulatory and other requirements, and the Company's shareholders
would be exposed to additional market risk during the period of such delay; (ii)
a complete liquidation would require the Levco Companies to be newly listed on
the New York Stock Exchange and in the event of changing market conditions, it
might not be possible for the Levco Companies to meet the requirements for such
listing, which the Board believed could result in a loss of liquidity to the
Company's shareholders; (iii) a partial liquidation would better preserve
continuity in the Company's management; and (iv) partial liquidation would
afford flexibility in permitting the Company to retain private placement
securities that the Board believed could not be sold on favorable terms during
the time frame contemplated by the Plan.
Lazard Freres' Analysis and Opinion
At the May 6th meeting, Lazard Freres presented to the Board an analysis
of the expected financial consequences of implementing the Plan and rendered an
oral opinion, subsequently confirmed in writing, that, as of May 6, 1999, the
receipt by the Company's shareholders of the distribution of cash and securities
as part of the Plan, and the retention of the Company Shares by such holders
immediately following that distribution, taken in the aggregate, is fair to the
Company's shareholders from a financial point of view.
The full text of the written opinion of Lazard Freres, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached to this proxy statement as Appendix B
and is incorporated herein by reference. Shareholders of the Company are urged
to, and should, read the opinion in its entirety.
In connection with rendering its opinion, Lazard Freres, among other
things, performed the following:
. held discussions with members of the Company's senior management with
respect to the financial terms and conditions of the proposed Plan;
. reviewed certain historical business and financial information
relating to each of the Company, CTO and the Levco Companies;
. reviewed various financial forecasts and other data provided to Lazard
Freres by each of CTO and the Levco Companies relating to their
businesses;
. held discussions with members of senior management of each of the
Company, CTO and the Levco Companies with respect to past and
current business operations and financial condition, regulatory
relationships, strategic objectives and the future prospects of their
respective companies;
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. reviewed public information with respect to certain other publicly-
traded, closed-end, registered investment companies and certain other
publicly-traded investment management companies;
. reviewed the historical stock prices and trading volumes of the
Company Shares and the CTO Shares; and
. conducted such other financial studies, analyses and investigations as
it deemed appropriate.
Lazard Freres relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and did not assume any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities or the
solvency of the Company, including the assets or liabilities or the solvency of
the Levco Companies. In that regard, Lazard Freres also assumed that all of the
securities to be liquidated pursuant to the Plan, other than certain privately
issued securities identified by management (the "Exception Securities"), will be
sold at prices equal to the market prices in effect at April 30, 1999; with
respect to the Exception Securities, Lazard Freres applied discounts to the
asset values that were specified by the Company's management and assumed such
Exception Securities will be sold at such discounted values. Lazard Freres
assumed that financial forecasts have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of each of the Company, CTO and the Levco Companies.
Lazard Freres assumed no responsibility for and expressed no view as to such
forecasts or valuations or the assumptions on which they were based. In
addition, Lazard Freres assumed that the distribution of the Company's
investment in CTO to the Company's shareholders would have no effect upon the
market for CTO's securities.
Pursuant to the direction of the Company's legal and tax advisors, Lazard
Freres also assumed, for purposes of its analysis, that each shareholder of the
Company is subject to income tax at an aggregate state and federal rate of 45%
on ordinary income and short-term capital gains and 25% on long-term capital
gains. These assumptions may not be correct for each individual shareholder, as
each shareholder will have tax considerations unique to its own position and
status. In addition, Lazard Freres assumed that the Plan would not result in a
return of capital to any shareholder in excess of such shareholder's tax basis
in the Company Shares. Lazard Freres also assumed that the Plan will be
consummated on the terms described to it by the Company's management and that
obtaining the necessary approvals for the Plan will not have an adverse effect
on the Company or the Levco Companies.
Lazard Freres' engagement by the Company and its opinion are for the
benefit of the Board and were rendered to the Board in connection with its
consideration of the Plan. Lazard Freres' opinion does not constitute a
recommendation as to how any Company shareholder should vote with respect to the
Plan.
WHY THE BOARD IS RECOMMENDING THE PLAN
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The following is a summary of certain of the financial analyses used by
Lazard Freres in connection with providing its opinion to the Board on May 6,
1999.
Historical Stock Trading Analysis. Lazard Freres reviewed the historical
trading prices and volumes for Company Shares on a weekly basis from April 29,
1994 through April 30, 1999. This analysis showed that the average discount to
net asset value for the Company Shares was18.5% over the past five years and
19.1% over the past year, with a discount of 26.1% on April 30, 1999. Lazard
Freres also compared the price performance of Company Shares on a weekly basis
from April 29, 1994 to April 30, 1999 with the performance of a group of two
"value" investment style closed-end funds, including Central Securities
Corporation and Zweig Fund (the "Value Peers"), a group of six "blend"
investment style closed-end funds, including The Adams Express Company, Gabelli
Equity Trust Inc., General American Investors Company, Inc., Liberty All-Star
Equity Fund, Salomon Brothers Fund, Inc. and Tri-Continental Corporation (the
"Blend Peers"), the Russell 1000 Value Index and the S&P 500 Index over the same
period. This analysis indicated that the price of Company Shares decreased 4.9%
over the past five years, while the Value Peers index increased 4.6%, the Blend
Peers index increased 40.1%, the Russell 1000 Value Index increased 153.7% and
the S&P 500 Index increased 204.5% over the same period. The analyses above
relate solely to stock price and do not take into account capital gains or other
distributions made by any of the above companies, including the Company, or any
of the companies included in the indices above. In addition, Lazard Freres
compared the discount or premium to net asset value at which Company Shares
traded on a weekly basis from April 29, 1994 through April 30, 1999 to the
discounts or premiums at which the Value Peers and the Blend Peers traded over
the same period. This analysis indicated that Company Shares traded at a
discount ranging from 12.4% to 27.5%, while the Value Shares trading prices
ranged from an 10.7% premium to a 17.4% discount, and the Blend Peers traded at
a discount ranging from 4.6% to 14.8% of net asset value.
Portfolio Overview. Lazard Freres noted that cash, cash equivalents and
publicly-traded investments represented, as of April 30, 1999, $694.0 million,
or $17.78 per Company Share, of the Company's $815.4 million, or $20.89 per
Company Share, total net asset value. Lazard Freres used market prices to
determine the values of the assets included in the Company's publicly-traded
investments.
Projected Assets to be Distributed to the Company's Shareholders Pursuant
to the Plan. Lazard Freres considered the net assets projected to be distributed
to the Company's shareholders pursuant to the Plan (such net assets are referred
to as the "Distributed Assets"). According to management's estimates of the
values of Company's assets and liabilities as of April 30, 1999, the Distributed
Assets would have an aggregate pre-tax value of $712.6 million, or $18.26 per
Company Share. Making certain assumptions regarding tax rates applicable to the
Company's shareholders outlined above, Lazard Freres noted that such holders
would be subject to an aggregate tax of $105.8 million, or $2.71 per Company
Share. Lazard Freres further noted that the Distributed Assets would have an
aggregate after-tax value of $606.8 million, or $15.55 per Company Share,
comprised of $541.8 million in cash, or
WHY THE BOARD IS RECOMMENDING THE PLAN
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$13.88 per Company Share, and $65.0 million in CTO Shares, or $1.67 per Company
Share. Lazard Freres further noted that, following completion of the Plan, the
Company's shareholders would retain an interest in the Levco Companies through
their ownership of Company Shares and that no value for such interest was
included in the Distributed Assets other than the proposed $20.0 million from
partial repayment of the Company's $65.0 million loan to Levin Management.
Interests of Company Shareholders. Lazard Freres compared the aggregate of
the after-tax amount set forth above and the estimated post-Plan value of the
Company Shares to the April 30, 1999 market price of $15.44 for the Company
Shares. In conducting these analyses, Lazard Freres reviewed two cases: (i) the
Levco Companies borrow $20.0 million of debt, with the proceeds used in partial
repayment of the Company's $65 million loan to Levin Management and the
remainder of the loan converted by the Company to equity of Levin Management;
and (ii) the entire $65 million loan is converted by the Company to equity of
Levin Management. For purposes of these analyses, Lazard Freres assumed that,
since the Levco Companies would represent the principal asset of the Company
after the Company completes the Plan, the estimated post-Plan value of the
Company Shares, prior to any indebtedness, would be $115.0 million, or $2.95 per
Company Share, which is the April 30, 1999 fair value for the Levco Companies as
determined by the Board and as reflected on the Company's statement of assets
and liabilities as of that date.
In the first case, Lazard Freres noted that the Company's shareholders
would receive Distributed Assets with an estimated after-tax value of $606.8
million, or $15.55 per Company Share, and $95.0 million in post-Plan Company
Shares, or $2.43 per Company Share, for a cumulative value of $701.8 million, or
$17.98 per Company Share, representing a premium of 16.5% over the April 30,
1999 market price for the Company Shares. In the second case, Lazard Freres
noted that the Company's shareholders would receive Distributed Assets with an
estimated after-tax value of $586.8 million, or $15.04 per Company Share, and
$115.0 million in post-Plan Company Shares, or $2.95 per Company Share, for a
cumulative value also of $701.8 million, or $17.98 per Company Share, also
representing a premium of 16.5% over the April 30, 1999 market price for the
Company Shares.
Break-even Analysis. Lazard Freres also conducted a break-even
analysis, consistent with the cases detailed above, to estimate the minimum
implied valuation required for the Levco Companies in order for the estimated
combined value of after-tax Distributed Assets and post-Plan Company Shares to
be equal to the April 30, 1999 market price for the Company Shares. In the first
case, Lazard Freres noted that the Company's shareholders would receive
Distributed Assets with an estimated after-tax value of $606.8 million, or
$15.55 per Company Share, an amount in excess of the April 30, 1999 market value
for the Company Shares prior to any value being ascribed to the post-Plan
Company Shares. In the second case, Lazard Freres noted that the Company's
shareholders would receive Distributed Assets with an estimated after-tax value
of $586.8 million, or $15.04 per Company Share; for the combined value of after-
WHY THE BOARD IS RECOMMENDING THE PLAN
11
<PAGE>
tax Distributed Assets and post-Plan Company Shares to be equal to the April 30,
1999 market price for the Company Shares would imply a multiple of the Levco
Companies' firm value (which is equal to the market value of the firm's
outstanding shares plus its long-term indebtedness less excess cash) to last-
twelve-months' operating income ("Firm Value/LTM Operating Income") as of
March 31, 1999 of 1.3x and a multiple of the Levco Companies' equity (which is
equal to the market value of the firm's outstanding shares) value to 1999
estimated cash net income ("Equity Value/1999E Cash Net Income"), projected by
the Levco Companies' management as of April 30, 1999, of 2.0x. Lazard Freres
compared these multiples with those of certain publicly-traded asset management
companies including Conning Corporation, Eaton Vance Corporation, Gabelli Asset
Management, Inc., Federated Investors, Inc., Franklin Resources, Inc., John
Nuveen Company, Phoenix Investment Partners, Ltd., T. Rowe Price Associates,
Inc., United Asset Management Corp. and Waddell & Reed Financial, Inc. These
companies were chosen because they are publicly-traded companies with operations
that, for purposes of this analysis, may be considered similar to the Levco
Companies. Lazard Freres noted that the median Firm Value/LTM Operating Income
multiple for these companies was 9.8x, with the lowest at 7.4x. Lazard Freres
further noted that the median Equity Value/1999E Cash Net Income multiple for
these companies was 11.9x, with the lowest at 9.8x.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible of partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Lazard Freres' opinion. In arriving at its fairness determination,
Lazard Freres considered the results of all these analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
the Company, CTO, the Levco Companies or the contemplated transaction. Lazard
Freres prepared the analyses solely for purposes of providing its opinion to the
Board as to the fairness, from a financial point of view, of the receipt of the
distribution of cash and securities to the Company's shareholders pursuant to
the Plan and the analyses do not purport to be appraisals or necessarily reflect
the prices at which businesses or securities actually may be sold. Analyses
based upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, neither the Company, Lazard Freres nor any other
person assumes responsibility if future results are materially different from
those contemplated. As described above, Lazard Freres' opinion to the Board was
one of many factors taken into consideration by the Board in making its
determination to approve the Plan. This summary does not purport to be a
complete description of the analyses performed by Lazard Freres and is qualified
by reference to the written opinion of Lazard Freres set forth in Appendix B to
the proxy statement.
Lazard Freres is an internationally recognized investment banking and
advisory firm. Lazard Freres, as part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and
WHY THE BOARD IS RECOMMENDING THE PLAN
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<PAGE>
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, leveraged
buyouts and valuations for estate, corporate and other purposes. Lazard Freres
was selected to act as investment banker to the Company in connection with the
Plan because of its reputation as an internationally recognized investment
banking and advisory firm. In the past, Lazard Freres has provided investment
banking services to the Company, including services related to the Company's
acquisition of the Levco Companies, for which Lazard Freres was paid customary
fees.
In the ordinary course of business, Lazard Freres and its affiliates may
actively trade in the securities of the Company or CTO for their own account and
for the accounts of their customers, and, accordingly, may at any time hold a
long or short position in such securities. As of the date hereof, Lazard Freres
holds no Company Shares or CTO Shares for its own account; Lazard Freres holds
1,250 Company Shares in customer and employee accounts.
Pursuant to letter agreements dated February 10, 1999 and April 29, 1999
(collectively, the "Engagement Letter"), the Company engaged Lazard Freres to
act as investment banker to the Board in connection with the Plan. In the
Engagement Letter, the Company agreed to pay to Lazard Freres (i) a fee of
$250,000 upon execution of the Engagement Letter, (ii) a fee of $250,000 upon
public announcement of the Plan, (iii) a fee of $250,000 upon publication of
this proxy statement and (iv) an additional fee of $1,750,000, less any fees
previously paid pursuant to clauses (ii) and (iii), upon consummation of the
Plan. The Company also agreed to reimburse Lazard Freres for certain out-of-
pocket expenses in connection with its engagement and to indemnify Lazard Freres
and certain related persons against certain liabilities, including liabilities
arising under the Federal securities laws, relating to or arising out of its
engagement.
WHY THE BOARD IS RECOMMENDING THE PLAN
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Conclusion
After extensive discussion on the information presented to the Board, the
mechanics of effecting the Plan and the consequences to the Company's
shareholders, the Board unanimously concluded that the proposed Plan was in the
best interests of the Company's shareholders. The Board preliminarily adopted
the Plan on May 6, 1999 and adopted the final form of the Plan on June 17, 1999.
SUMMARY OF THE PLAN
The text of the Plan is attached to this Proxy Statement as Appendix A.
The information below is only a summary and is qualified in its entirety by
reference to the Plan.
Plan Description
The Plan authorizes the Company to:
WHY THE BOARD IS RECOMMENDING THE PLAN
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<PAGE>
. stop investing in accordance with the Company's current investment
objectives, restrictions and policies, liquidate the securities held
in the public portfolio and continue liquidating the private
portfolio;
. invest the proceeds of the liquidation in short-term, liquid
investments;
. distribute the proceeds of the liquidation and the Company's shares of
CTO to the Company's shareholders;
. prepare and file the documents necessary to deregister the Company as
an investment company and close the Company's Chicago office after the
Company has deregistered; and
. continue in business as a holding company, the principal asset of
which will be the Levco Companies.
The Plan will become effective immediately upon approval by the Company's
shareholders, although the Company will not complete implementing the Plan for
several months. Until the Plan has been completely implemented - that is, until
the Company has completed the distributions contemplated by the Plan and
deregistration as an investment company has occurred - the Board has the power
to abandon, defer or modify the distributions or any other matter the Plan
contemplates. The Board will take such an action only if it concludes that doing
so will be in the best interests of the Company and its shareholders.
Liquidation of Private and Public Portfolios and Distribution of Proceeds
The Plan provides for the sale of the securities in the public and private
portfolios. Under the Plan, the Company's officers will continue their efforts
to sell the securities in the private portfolio and Levco will sell the
securities in the Company's public portfolio in an orderly manner over a period
of time, in each case, at prices and on terms and conditions as the Company's
officers and Levco believe are reasonable and in the best interests of the
shareholders and the Company. As portfolio securities are sold, the Company's
officers will invest the proceeds in short-term, high quality investments.
As of May 31,1999, the total value of the Company's public portfolio and
private placement securities was approximately $619 million, and the Company's
tax basis in those securities totaled approximately $477 million. Included in
these totals are private placement securities whose values, totaling about $11
million, were determined by the Board. The amount of proceeds from the
liquidation the Company will distribute to shareholders will depend on the
values of the securities when they are sold and the costs the Company incurs,
including commissions, to sell the securities. The final amounts the Company
will distribute to shareholders may be more or less than the values of the
Company's securities noted above. The public announcement and the timing of the
commencement of the Plan's implementation may also affect the prices at
PLAN SUMMARY - LIQUIDATION OF
PRIVATE AND PUBLIC PORTFOLIOS
15
<PAGE>
which the Company sells these securities. The Company will retain some of the
sale proceeds to pay for the expenses of implementing the Plan, the reverse
stock split (see "Approval of Amendment to the Certificate of the Incorporation
of Baker, Fentress & Company" for information on the reverse stock split), for
operating the Chicago office until it is closed, for on-going costs of the
Company and for other expenses in connection with the Plan, including severance
and other employee-related matters.
The Company will distribute the net cash proceeds of the sales of the
Company's securities investments to shareholders on a proportionate basis, based
upon the number of shares each shareholder owns at various record dates that the
Company will determine and announce. The Company has not yet finalized the
schedule for making the distributions. However, at this time, the Company
believes it will make its first distribution of cash (which will consist of an
initial capital gain distribution) on September 24, 1999 (to shareholders of
record at a date the Board will determine). This distribution probably will
occur at or about the same time the Company distributes its CTO Shares to
shareholders (see "Distribution of CTO Shares" below). The Company plans to
distribute the balance of the net cash proceeds in one or two additional
distributions (again, to shareholders of record at a date the Board will
determine). If the Company decides to make only one additional distribution
(which would consist of an ordinary income dividend, a long-term capital gain
distribution, a distribution of retained earnings and profits and a return of
capital), the Company believes it would make that final distribution on January
7, 2000. However, if the Company decides to make two additional distributions,
the Company believes the first additional distribution (which would consist of
an ordinary income dividend and a long-term capital gain distribution) would
occur in late December 1999, with a final distribution (which would consist of a
distribution of retained earnings and profits and a return of capital) on
January 7, 2000. These dates and proposed distributions are tentative and the
Board may change them.
Federal Income Tax Consequences of the Liquidation and Distribution. The
distributions of cash from the sale of the Company's securities will be taxable.
The taxable amounts will depend on the amounts received by the Company for the
securities sold, the Company's basis in such securities and your basis in your
Company shares. See "FEDERAL INCOME TAX CONSEQUENCES" for more information on
the tax consequences of the distribution.
Distribution of CTO Shares
The Plan includes a special dividend to Company shareholders of all of the
CTO Shares owned by the Company. As a result of the distribution of CTO Shares,
Company shareholders will own the CTO Shares directly and will enjoy greater
flexibility in making investment decisions regarding CTO. Your proportionate
ownership interest in CTO will not change (except as affected by fractions see
"Partial or Fractional Shares" below). After the distribution of the CTO Shares,
you will own directly the same economic interest in CTO you now own through your
ownership of shares of the Company's stock.
Manner of Effecting the Distribution. If shareholders approve the Plan and
all other conditions to the distribution are satisfied (or waived by the Board),
the Company currently anticipates that it will distribute the CTO Shares on
September 24, 1999 (to shareholders of record at a date the Board will
determine). This date is tentative and
PLAN SUMMARY- DISTRIBUTION OF
CTO SHARES
16
<PAGE>
the Board may change it. At or about the time the Board sets the record date and
the date for the distribution of the CTO Shares, it will determine the number of
CTO Shares it will distribute in proportion to each Company Share. The Board
will base this determination on the number of Company Shares and CTO Shares
outstanding. The Company currently estimates that you will receive 1 CTO Share
for each 7.8058 Company Shares you own, based on the number of Company Shares
and CTO Shares outstanding on May 31, 1999. On the distribution date, the
Company will deliver all of the outstanding CTO Shares that it owns to
ChaseMellon Shareholder Services, LLC, the Distribution Agent. The Distribution
Agent will then mail the certificates for the CTO Shares to Company shareholders
who are entitled to receive them as of such record date. All the CTO Shares will
be fully paid and nonassessable. CTO shareholders will not be entitled to
preemptive rights, which means that CTO shareholders will not have the right to
buy additional shares of a new issue to preserve their equity before others have
a right to purchase shares of the new issue. See "Description of CTO Capital
Stock" below.
Company shareholders do not have to exchange their Company Shares for CTO
Shares. DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
Partial or Fractional Shares. The ratio of CTO Shares to Company Shares
that the Company will use to determine the number of CTO Shares to give to each
shareholder will result in Company shareholders being entitled to partial CTO
Shares. The Company will not send out certificates for partial CTO Shares.
Instead, the Distribution Agent will pool all the fractional shares together and
sell them at the prevailing market price, at such times and in such amounts as
the Distribution Agent shall determine, and distribute the net cash proceeds
(after deduction of brokerage fees) to the Company shareholders who would have
received the partial CTO Shares. The Company will pay the fees and expenses of
the Distribution Agent.
Federal Income Tax Consequences of the Distribution. The distribution
of CTO Shares will be taxable. The taxable amount will depend on the number of
shares you receive from the Company, the Company's basis in such securities and
the market value of the CTO Shares on the date of distribution. See "FEDERAL
INCOME TAX CONSEQUENCES" for more information on the tax consequences of the
distribution.
Listing and Trading of CTO Shares. CTO Shares are currently traded on the
AMEX under the symbol "CTO." For a description of CTO Shares see "Description of
CTO Capital Stock" below. It is expected that CTO Shares will continue to be
listed and traded on the AMEX after the distribution. The distribution will
cause a significant number of additional CTO Shares to be available for trading,
and there can be no assurance as to the prices at which trading in CTO Shares
will occur after the distribution. The prices at which the CTO Shares trade may
fluctuate significantly until the Company fully distributes the CTO Shares, the
Distribution Agent concludes its sales of fractional CTO Shares and an orderly
market develops. The marketplace will determine
PLAN SUMMARY- DISTRIBUTION
OF CTO SHARES
17
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the prices at which the CTO Shares ultimately trade. The price may be influenced
by, among other factors, the depth and liquidity of the market for the CTO
Shares, investor perception of CTO and the industry in which CTO participates,
CTO's operating results, CTO's dividend policy and general economic and market
conditions. The Company cannot assure you that the CTO Shares distributed will
trade at a price equal to or above the price at which they were included in
calculations of the Company's net asset value - in other words, the price could
go up or down.
CTO Shares have experienced substantial and lengthy periods of illiquidity
in the past. Although the CTO board has stated that it is continuing to consider
implementing a self-tender offer or other stock buyback program, there can be no
assurance that an active or liquid trading market will develop, or that if one
develops, that it will continue. A public market having the desirable
characteristics of depth, liquidity and orderliness depends on the simultaneous
presence in the market of both willing buyers and sellers of CTO Shares, which
is not within the control of the Company or CTO.
Relationship Between CTO and the Company after the Distribution. Mr. Allen,
Mr. Goodwin, Mr. Gorter, Mr. Levin and Mr. Peterson, each of whom are officers
and/or directors of the Company, are also direct shareholders of CTO. Certain of
Levco's clients are also shareholders of CTO. Each of the officers and directors
of the Company and Levco's clients who own Company Shares will receive CTO
Shares in the distribution, on exactly the same terms as every other
Shareholder. See "Manner of Effecting the Transaction"
Following the distribution, Mr. Allen will continue to be CTO's Chairman,
President and Chief Executive Officer and will also serve as a director of the
Company. Mr. Peterson will also continue to serve as a director of CTO. No other
person will hold a position with both the Company and CTO at that time.
Although the Company has controlled CTO for many years, CTO operates
autonomously and there have not been interested transactions or affiliated
relationships between the Company and CTO that materially impact CTO's business
operations. As a result, the Company does not expect that CTO's business will be
significantly affected if the Company is no longer its majority shareholder.
CTO Dividend Policy. CTO has paid dividends annually on a continuous basis
since 1976. Nevertheless, the determination of the amount of future cash
dividends, if any, that CTO will declare and pay is in the sole discretion of
CTO's board and will depend on CTO's financial condition, earnings and funds
from operations, the level of its capital expenditures, dividend restrictions in
its financing agreements, its future business prospects and other matters as
CTO's board deems relevant.
Description of CTO Capital Stock. At the date hereof, the authorized
capital stock of CTO is 10,050,000 shares, consisting of 10,000,000 shares of
common stock (of which the Company owns, and will distribute, 5,000,000) and
50,000 shares of
PLAN SUMMARY - DISTRIBTUION OF
CTO SHARES
18
<PAGE>
preferred stock. There are a total of 6,371,833 shares of CTO outstanding as of
May 31, 1999. No shares of preferred stock are currently outstanding.
Publicly Available Documents. The SEC allows us to provide information
about CTO by referring you to the documents that CTO files under the Securities
Exchange Act of 1934. CTO has informed the Company that it is current in its
reporting obligations. For details about CTO, its business, management, capital
structure and current happenings at CTO, you may wish to review the documents
listed below. Each document is available on the SEC's website (www.sec.gov) or
-----------
may be obtained without charge by contacting Consolidated-Tomoka Land Co., 149
South Ridgewood Avenue, Daytona Beach, Florida 32114, or by calling (904) 255-
755 8:
. Annual Report on Form 10-K for the year ended December 31, 1998.
. Annual Report to Shareholders for the year ended December 31, 1998.
. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
. Current Reports on Form 8-K dated May 10, 1999 and April 22, 1999.
Deregistration as Investment Company
The Plan provides for the eventual cessation of the Company's investment
activities and its deregistration under the Investment Company Act, which
requires the SEC to enter an order declaring that the Company has ceased to be
an investment company. The Company plans to apply for deregistration promptly
and will seek to have the order entered as soon as practicable after the date of
the last distribution. The Company anticipates that the SEC will issue an order
approving the deregistration of the Company when the Company is no longer doing
business as an investment company.
Until the SEC issues the deregistration order, the Company will continue to
be subject to, and intends to comply with, the Investment Company Act. After the
issuance of the deregistration order, the Company will be subject to the rules
and regulations applicable to public operating companies. The Company will file
with the SEC an annual report on Form 10-K, quarterly reports on Form 10-Q and
other reports required of public companies, and will continue to hold its annual
meeting of shareholders.
In connection with the cessation of investment company activities and
deregistration of the Company, the Company will close its Chicago office.
Currently, the Chicago office employs 10 people, of which five are also officers
of the Company. The Company intends to retain these employees through about June
30, 2000, so that they can assist in the ongoing business of the Company and the
distribution and liquidation of the Company's assets.
PLAN SUMMARY - DEREGISTRATION
OF INVESTMENT COMPANY
19
<PAGE>
The following discussion is intended only to aid shareholders in assessing
the Plan. Employees of the Chicago office may receive year-end bonuses for 1999
and salary increases for 2000 consistent with past practice. Employees who leave
the Company prior to the actual closing of the Chicago office will receive
certain benefits, including full vesting of the Baker Fentress Money Purchase
Pension Plan (see "Compensation - PENSION PLAN" for a description of the Pension
Plan), to the date of leaving, certain health insurance coverage and payment for
unused vacation days. Employees who stay through the date of the closing of the
Chicago office or until the Company's need for their services has ceased will
receive additional benefits, including a tenure payment equal to a portion of
the employee's salary multiplied by the number of years employed by the Company;
a termination bonus equal to the employee's 1998 bonus times a factor of five;
and extended health insurance coverage. The Company estimates that the aggregate
costs of these benefits will be approximately $1,210,000.
STRUCTURE OF THE COMPANY AFTER THE DISTRIBUTIONS
The Levco Companies
Background. If the Company's shareholders approve the Plan, the principal
asset of the Company following consummation of the Plan will be the Levco
Companies.
As a shareholder of the Company, you already own an interest in the Levco
Companies. However, after liquidation of the private and public portfolios of
the Company and the distribution of CTO shares, your interest in the Company
will be comprised solely of an interest in the Levco Companies and in whatever
private placement securities the Company does not sell prior to the distribution
under the Plan. Because your investment in the Company will change, set forth
below is a description of the Levco Companies' primary business and a discussion
of the principal risks of investing in an investment adviser (which is what the
primary business of the Company will become after consummation of the Plan).
The Company believes that implementing the Plan will provide the Levco
Companies with opportunities for growth by eliminating the restrictions on its
activities that the Investment Company Act imposes and by enhancing its ability
to attract and retain professionals. There can be no assurance, however, that
the Levco Companies will be successful in capitalizing on available growth
opportunities. The Company is currently exploring whether to change the name of
its investment management business.
Description of Levco. Levco is a registered investment adviser that
specializes in managing equity portfolios for institutional and individual
investors primarily in the
PLAN SUMMARY - DEREGISTRATION
OF INVESTMENT COMPANY
20
<PAGE>
United States. Most accounts are managed pursuant to a large cap value strategy,
but the firm also offers an event-driven, risk arbitrage product and other more
specialized investment programs.
In addition to serving as investment adviser to the Company for its public
portfolio, Levco also serves as an adviser or subadviser to other registered
investment companies, including the Levco Equity Value Fund, the MainStay
Research Value Fund and a portion of the portfolio of the Vanguard Equity Income
Fund.
Levco also acts through its wholly-owned subsidiary, Levco GP, Inc., as the
general partner of a number of private investment partnerships and serves
directly as an adviser to private investment vehicles organized outside the
United States. For managing these vehicles, Levco and Levco GP, Inc. are
entitled to receive both a fixed management fee based on a percentage of the
assets and a share of net profits.
Since July 1996, Levco has participated in a wrap fee program sponsored by
a major brokerage firm. In 1999, Levco began participating in a wrap fee program
with another major brokerage firm. In these programs, clients pay the sponsor an
asset-based fee that covers brokerage commissions, advisory services, custodial
fees and other reporting and administrative services. Investors are able to
select Levco from among the limited number of managers participating in the
program, and Levco receives a portion of the wrap fee paid by the clients who
select Levco to manage their accounts through the program. As of May 31, 1999,
Levco has approximately 4,200 wrap fee accounts for which it receives a fixed
asset-based fee from the sponsor.
LEVCO Securities, Inc., a wholly-owned subsidiary of Levco, is a registered
broker-dealer that clears through Correspondent Services Corporation, a
PaineWebber company, on a fully-disclosed basis. Generally, Levco Securities'
clients are advisory clients of Levco, and the trades executed through it are
generally placed by Levco in its capacity as investment adviser.
Levco's Clients
Levco's investment advisory business includes services provided to
institutional and individual accounts, wrap fee accounts, partnership accounts
and subadvisory accounts.
[Pie charts omitted]
<TABLE>
<CAPTION>
Types of Clients
<S> <C>
Arbitrage 6%
Institutional 45%
Investment Companies 14%
Individual 22%
Partnerships 1%
WRAP 12%
</TABLE>
Detail of Institutional Clients
<TABLE>
<CAPTION>
<S> <C>
Foundation and Endowment 35%
Corporation and Public 25%
Taft-Hartley 17%
Insurance and Other 23%
</TABLE>
STRUCTURE OF COMPANY AFTER DISTRIBUTION - LEVCO
21
<PAGE>
Total Assets Under Management - All Clients Total Assets Under Management -
Institutional:
$8,271 million $3,661 million
__________________
Data as of 5/31/99
Institutional and Individual Accounts. Institutional accounts represented
45% of Levco's total assets under management, with a total market value of
$3,661 million at May 31, 1999. Currently, Levco serves as investment adviser to
more than 130 separate institutional accounts. The average institutional account
value at May 31, 1999 was approximately $28 million.
Levco also manages accounts for individuals, which comprised approximately
22% of Levco's total assets under management as of May 31, 1999. Levco's
individual client base represented more than 480 accounts, the average value of
which at May 31, 1999 was approximately $4 million.
Investment companies represented 14% of Levco's total assets under
management, with a total market value of $1,142 million as of May 31, 1999.
Currently, Levco serves as investment adviser or subadviser to four investment
companies: Levco Equity Value Fund, Vanguard Equity Income Fund, MainStay
Research Value Fund and the Company. As of May 31, 1999, Levco managed $548
million of assets for the Company, which represented 48% of the total assets of
the advised and sub-advised investment companies. If shareholders approve the
Plan, Levco will no longer manage the Company's assets.
Wrap Fee Accounts. With approximately $1,005 million of managed assets as
of May 31, 1999, wrap fee accounts represented 12% of Levco's total assets under
management. Levco had more than 4,200 wrap fee accounts which had an average
value as of May 31, 1999 of approximately $231,000.
Levco Partnerships. The Levco Partnerships represented approximately 1.5%
of Levco's total assets under management, with a total market value of $121
million as of May 31, 1999 (excluding the arbitrage partnership).
Arbitrage Accounts. Arbitrage accounts represented 6% of Levco's total
assets under management with a total market value of $493 million as of May 31,
1999.
The table below shows the assets under management of Levco at the dates
indicated:
STRUCTURE OF COMPANY AFTER DISTRIBUTION - LEVCO
22
<PAGE>
Assets Under Management (in millions)
-------------------------------------
<TABLE>
<CAPTION>
At May 31, At December 31,
----------------------------------------------------------------------
Advisory Accounts 1999 1998 1997 1996 1995 1994
- ----------------- ---------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Institutional and
Individual Accounts* $6,652 $7,074 $6,711 $6,097 $5,037 $3,505
Levco Partnerships 121 127 158 224 221 190
Arbitrage Accounts 493 355 139 123 129 120
Wrap Fee Accounts 1,005 757 351 45 0 0
---------- ------------- ------------ ------------ ------------ ------------
TOTAL $8,,271 $8,313 $7,359 $6,489 $5,387 $3,815
========== ============= ============ ============ ============ ============
</TABLE>
* Includes the Company's assets under management, which assets the Company
will sell, and Levco no longer will manage, if shareholders approve the
Plan.
Levco's assets under management have increased over each of the periods
indicated. The growth has been generated by maintaining a relatively stable
client base, attracting new clients, entering the wrap fee business, and market
appreciation of assets under management. Levco's wrap fee business, which Levco
began in 1996, has attracted net "new business" - meaning that the assets under
management of new clients and additional contribution of assets by existing
clients have exceeded withdrawals of assets by clients. In 1997 and 1998,
Levco's separate account business grew overall, although the level of
redemptions from separate account clients was higher than the amount of new
assets Levco obtained. Increases in assets from market appreciation more than
offset the net withdrawals. During the first five months of 1999, market
appreciation approximately offset net withdrawals by clients.
Financial Information about the Levco Companies
The consolidated revenues of Levin Management consist principally of
investment management fees (called "IMF Fees") based on the value of assets
under management, from separately managed accounts, wrap fee accounts and the
Levco Partnerships, as well as incentive allocations to Levco GP from the Levco
Partnerships and performance fees from certain managed accounts.
The table below shows Levin Management's consolidated revenues and
operating income for the periods indicated. For pro forma financial information
about the Company and Levco, see Appendix D.
Revenues and Operating Income (in millions) (unaudited)
-------------------------------------------------------
<TABLE>
<CAPTION>
For Three Months
Ended March 31, At December 31,
--------------------------- ----------------------------------------------
1999 1998 1998 1997 1996(a)
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Advisory Fees:
IMF Advisory $8.2 $8.5 $32.3 $33.6 $29.1
IMF WRAP Accounts 1.0 0.7 3.6 1.2 0.0
</TABLE>
STRUCTURE OF COMPANY AFTER DISTRIBUTION - LEVCO
23
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Other 0.2 0.0 0.3 0.0 0.0
---------- ---------- ---------- ----------- -----------
Total Advisory Fees 9.4 9.2 36.2 34.8 29.1
Arbitrage and Partnership
Incentive Fees 2.6 1.2 4.3 2.8 4.7
---------- ---------- ---------- ----------- -----------
Total Fees 12.0 10.4 40.5 37.6 33.8
Other 0.4 0.4 1.5 1.6 1.3
---------- ---------- ---------- ----------- -----------
Total Revenues 12.4 10.8 42.0 39.2 35.1
Expenses:
- --------
Salaries and Benefits 2.9 2.2 8.7 7.1 6.6
Bonus (incl. guaranteed) 3.5 3.2 13.6 10.4 (c) 7.9 (b)
---------- ---------- ---------- ----------- -----------
Total Compensation 6.4 5.4 22.3 17.5 14.5
Non-Compensation Expenses 1.7 1.0 6.0 4.1 4.1
---------- ---------- ---------- ----------- -----------
Total Expenses 8.1 6.4 28.3 21.6 18.6
---------- ---------- ---------- ----------- -----------
Operating Income(d) $4.3 $4.4 $13.7 $17.6 $16.5
========== ========== ========== =========== ===========
</TABLE>
______________________
(a) The information shown for 1996 includes the period before the Company's
acquisition of Levco on June 28, 1996.
(b) Pro forma for agreed-upon revenue split pursuant to the bonus plan approved
by shareholders in 1996 bonus expense.
(c) Excludes $1.6 million of non-recurring.
(d) Operating income as shown excludes interest income, interest expense and
taxes on income.
Management fees for all periods include the fees the Company paid to Levco,
which will not continue after the Company sells its public portfolio securities.
The Company's fees to Levco for the first quarter of 1999 were $300,000
(approximately 2.4% of total revenues), for 1998 were $1.5 million (about 3.6%
of total revenues), for 1997 were $1.5 million (about 3.8% of total revenues)
and for the six-month period ended December 31, 1996 were $750,000 (about 2.1%
of total revenues).
Levin Management's largest expense is salary and bonus for its employees.
Expenses relating to salary and bonus increased significantly over the periods
indicated. During that time, Levco made significant investments in developing
its client servicing and marketing areas. It hired additional employees,
including more senior employees, such as senior portfolio managers and a
Director of Institutional Marketing. The institutional marketing group focuses
on serving and attracting institutional clients such as corporations, pension
plans, university endowments, and non-profit foundations. Levco has also
launched an effort to enhance its institutional client relationships and raise
its profile in the consultant community. It is also beginning to target public
employee and labor union pension plans. In 1996, Levco had 53 employees, of
which 16 were portfolio managers, traders and analysts. As of May 31, 1999,
Levco employed 79 people, of which 22 were portfolio managers, traders and
analysts. Although this increase in the number of employees and, especially the
number of professional employees, has led to an increase in recruiting expenses
and other expenses relating to salaries and bonuses, Levco believes the
additions of these employees will permit it to provide superior service to its
clients and to be positioned to further develop its business. Levco also
increased the level of investment in promotional spending and expanded its
office space, each of which increased Levco's expenses.
STRUCTURE OF COMPANY AFTER DISTRIBUTION - LEVCO
24
<PAGE>
Levco's audited financial statements at and for the years ended December
31, 1998 and December 31, 1997 are attached to this proxy statement as Appendix
C. The condensed pro forma financial statements of the Company, including the
Levco Companies, are attached to this proxy statement as Appendix D.
Levco's Contractual Arrangements
Levco has entered into investment advisory and management agreements
with, or for the benefit of, each of its clients. Levco bases its management
fees, other than incentive allocations from the Levco Partnerships,
performance-based fees and certain fixed dollar amount arrangements (generally
with family members of employees), on a percentage of assets under management
and scales these fees according to the size of each account. Either the client
or Levco generally may terminate these contracts without penalty within five
business days of the date of acceptance. Thereafter, either party typically may
terminate the agreement at any time upon written notice. In cases in which Levco
serves as an adviser or sub-adviser for a mutual fund client, the fund or the
investment adviser generally may terminate the relevant sub-advisory agreement
on relatively short notice.
In connection with Levco's activities as a broker-dealer, Levco maintains a
contractual relationship with Correspondent Services Corp., a PaineWebber
company, for clearance services. The agreement is a standard clearing agreement
that either party may terminate upon 60 days prior written notice (or
immediately for cause). It assigns account supervisory responsibility to Levco
and grants the clearing agent the authority to execute and report securities
transactions for Levco's clients.
Directors and Officers of Levco
Shown below is a list of each current director and officer of Levco, his or
her present position, age at June 23, 1999, and principal occupations during the
last five years. Messrs. Levin and Gorter are also officers and directors of the
Company. Mr. Kigner is also a director of the Company. All Levco directors serve
until the election of their successors.
John A. Levin, 60, Director, Chairman and Chief Executive Officer. Chairman
and Chief Executive Officer of Levin Management and Levco since June 1996; prior
thereto, President and Securities Analyst/Portfolio Manager of the predecessor
to Levco.
Jeffrey A. Kigner, 38, Director, Co-Chairman and Chief Investment Officer.
Co-Chairman of Levin Management and Levco since July 1997 and Chief Investment
Officer of Levco since September 1997; prior thereto, Executive Vice President
of Levco from June 1996 to June 1997; prior thereto, Securities
Analyst/Portfolio Manager of the predecessor to Levco.
STRUCTURE OF COMPANY AFTER DISTRIBUTION - LEVCO
25
<PAGE>
Glenn A. Aigen, 36; Director, Vice President and Chief Financial Officer.
Vice President and Chief Financial Officer of Levin Management and Levco since
June 1996; prior thereto, Director of Operations of the predecessor to Levco
from November 1993 to June 1996.
James P. Gorter, 69, Director. Director of Levin Management and Levco since
June 1996; Chairman of the Board of the Company; limited partner of Goldman
Sachs & Co. until May 1999.
Anson M. Beard, Jr., 63, Director. Director of Levin Management and Levco
since July 1997 and Advisory Director at Morgan Stanley Dean Witter & Co. since
July 1997; prior thereto, Managing Director at Morgan Stanley & Co.
Carol L. Novak, 51, Vice President and Secretary. Vice President and
Secretary of Levin Management and Levco since June 1996; prior thereto,
Secretary and Treasurer of the predecessor to Levco.
Levco is currently engaged in a search for a chief operating officer
whose responsibilities would include internal administration and the development
and implementation of business strategy.
Levco's Employees
At May 31, 1999, Levco employed 79 people, including 22 investment
professionals of whom 11 were primarily portfolio managers, seven were primarily
securities analysts and four were traders or trading associates. The 22
investment professionals have more than 275 years of collective experience in
finance, with an average of 13 years in the industry, and five years at Levco or
its predecessor. The senior investment professionals have an average of eight
years at Levco or its predecessor.
Levco's Properties
Levco's executive offices are located at One Rockefeller Plaza, New York,
New York 10020. Levco's offices currently encompass approximately 33,000 square
feet and are governed by a 10-year lease, which expires in January 2008. The
majority of Levco's operations are conducted at this location and the Company's
business will be conducted at this location after the Company closes its Chicago
office. Levco expanded its space to its current configuration in 1998 and Levco
believes that its facilities are adequate for its current level of operations
and the anticipated level of operations should the Company's shareholders
approve the Plan.
STRUCTURE OF COMPANY AFTER DISTRIBUTION - LEVCO
26
<PAGE>
CHANGES THAT WILL RESULT FROM IMPLEMENTING THE PLAN
There are several changes that will occur as a result of the Company
implementing the Plan:
. Levco will no longer manage the Company's public portfolio. This will
reduce Levco's revenues by the amount of the fees the Company has paid
to Levco, which totaled $1.5 million in 1998 and $1.5 million in 1997.
. Levin Management owes the Company $65 million, which was incurred in
connection with the acquisition of Levco. Levin Management currently
is exploring relationships with unrelated lenders that could enable it
to borrow, during the fourth quarter of 1999, up to $20 million to use
to repay part of its debt to the Company. To the extent that
borrowings are not available on terms that the Board deems advisable,
or not used to repay debt, the Company expects to contribute the
remaining debt to Levin Management's capital, which means that Levin
Management will not repay such debt.
. If the Company were not an investment company, it would have been
required to account for the 1996 acquisition of Levco as a "purchase."
The effect of that would have been that the excess of the purchase
price over the fair value of the assets acquired would have appeared
on Levin Management's balance sheet as goodwill and other intangible
assets, such as employment contracts and advisory agreements. These
intangibles would have been allocated to the various acquired assets
and amortized (reducing the Company's earnings) over the useful life
of each asset.
When the Company ceases to be an investment company, it will have to
account for the acquisition in this way. The Company will then prepare
consolidated financial statements (including the Company and the Levco
Companies) to give effect to that acquisition. The consolidated
balance sheet will include an amount of goodwill and other intangibles
equal to the amount of goodwill and other intangibles that the Company
would have included at the time of the acquisition had it been subject
to these rules, less the amount that the Company would have amortized
from the time of the acquisition through the date of the new financial
statements.
The amortization of the goodwill and intangibles will have the effect
of reducing the Company's reported earnings, but will not reduce the
Company's cash flow.
. Initially, the Company does not expect to pay significant dividends,
if any, to its shareholders and the Company will not have an income,
dividend or capital gain reinvestment plan.
27 CHANGES THAT WILL RESULT FROM
IMPLEMENTING THE PLAN
<PAGE>
. A daily net asset value will no longer be applicable; instead, the
Company's value will be reflected in its stock price.
. Shareholders will have a direct interest in CTO.
These changes, and others, are reflected in the pro forma condensed balance
sheet and statement of income that are attached to this proxy statement as
Appendix D. The pro forma statements are based on the audited financial
statements of the Company and Levin Management as of December 31, 1998, with the
adjustments described in Appendix D.
FEDERAL INCOME TAX CONSEQUENCES
Under current Federal tax law, the following are the Federal income tax
consequences generally arising with respect to the Plan. This discussion is
intended for your information in considering how to vote on the proposals and
not as tax guidance to shareholders.
This summary of federal tax consequences of the Plan is based on the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated under the Code, and judicial and administrative interpretations of
the Code and regulations, all as in effect on the date of this Proxy Statement.
These laws, regulations, and interpretations all are subject to change and those
changes may be retroactive. This summary does not discuss tax consequences under
state, local, or foreign tax laws or tax consequences to persons that are
subject to special tax rules, such as banks, insurance companies, regulated
investment companies, personal holding companies, foreign entities, nonresident
alien individuals, broker-dealers and tax-exempt entities. You should consult
with your own tax advisors to determine the tax effect of the proposed
transactions and, specifically, the tax effect of the application of United
States federal income tax laws, as well as the laws of any state, local, or
foreign taxing jurisdictions, to your particular situation.
Status of the Company as Regulated Investment Company
The Company has operated for federal income tax purposes as a regulated
investment company under Subchapter M of the Code and intends to continue to
qualify as a regulated investment company through December 31, 1999. Thereafter
the Company intends to be treated for federal tax purposes as a C corporation,
i.e., a corporation subject to the general rules of corporate taxation. (See
"Termination of Regulated Investment Company Status" below.)
As part of the Plan, the Company intends to sell substantially all of its
investments, except for its stock in CTO and Levco. These sales will be taxable
transactions for the Company, with gain or loss measured by the excess, or
deficit, as the case may be, of the amount received for the securities minus
their adjusted federal tax basis in the hands of the Company. The character of
such gain as short-term or long-term will be
28 CHANGES THAT WILL RESULT FROM
IMPLEMENTING THE PLAN
<PAGE>
determined by the period for which the Company has held the securities, rather
than the period for which you have held your Company Shares. For federal tax
purposes, the distribution of CTO Shares by the Company to its shareholders will
be treated as a sale by the Company of its CTO Shares for fair market value,
causing the Company to realize a long-term capital gain equal to the excess of
such value over the Company's adjusted tax basis in its CTO Shares.
As long as it continues to comply with the distribution and diversification
requirements applicable to regulated investment companies, the Company itself
will not be liable for federal taxes on its sales of securities or its
distribution of CTO Shares pursuant to the Plan; rather you will include in your
income the amount of net investment income and net realized capital gain that is
distributed to you. (See "Treatment of Company Shareholders.") The Plan
contemplates that the Company will make distributions of cash and CTO Shares
that you will be required to include in your income with respect to the year
ended December 31, 1999. These distributions will include substantially all of
the income and gain recognized by the Company in 1999 from its sales of
securities as part of the Plan as well as the gain required to be recognized by
the Company with respect to the distribution of CTO Shares. However, in order to
comply with the requirement that a regulated investment company not have more
than 25% of the total value of its assets invested in securities of a single
issuer (other than of the United States government) as of the end of a calendar
quarter, the Company will retain a significant portion of the cash proceeds from
sales of securities through December 31, 1999, and not distribute such retained
amount until January 2000. Dividends and capital gain distributions that the
Company declares in the fourth quarter of 1999 but does not distribute to you
until January 2000, will nevertheless be treated for federal tax purposes as
though you received them on December 31, 1999.
The Company will send you information in early 2000 describing the amount
of net investment income and net realized capital gain that will have been
distributed to you with respect to the taxable year ending December 31, 1999. At
that time the Company will also identify the amounts of distributions made in
January, 2000, that will be treated as having been received by you on December
31, 1999.
Treatment of Company Shareholders
In carrying out the Plan, the Company expects to make the following
distributions: (i) a distribution of cash and CTO Shares in September 1999 and
(ii) one or two additional distributions of cash in December and January (if two
distributions) or in January 2000 (if one distribution). The Company will send
you information concerning the record date for each distribution, the amount of
each distribution, its status for federal income tax purposes, and the taxable
year to which it relates. This section summarizes the general effects of this
series of distributions.
As a shareholder of a regulated investment company, you will be required to
include in your income the amount of Company net investment income and net
realized
29 FEDERAL INCOME TAX CONSEQUENCES OF
THE PLAN
<PAGE>
capital gain that is distributed to you by the Company with respect to the
taxable year ending December 31, 1999. This amount will include your share of
income and gains attributable to the Company's sales of substantially all its
securities in 1999, the gain realized by the Company on CTO Shares distributed
in 1999, and other net investment income or net realized capital gain of the
Company for 1999. Any portion of the distribution of net investment income and
net realized capital gains you receive in January 2000, that represents a
dividend declared in the fourth quarter of 1999 will be deemed to be received by
you on December 31, 1999.
Your basis in CTO Shares distributed by the Company to you will be equal to
their total fair market value on the date of distribution. Your tax holding
period for CTO Shares distributed to you by the Company will commence on the
date of distribution.
Any amounts that are distributed to you in excess of the Company's net
investment income and net realized capital gain will be treated as dividends and
taxed as ordinary income, to the extent of the Company's accumulated earnings
and profits from periods before it qualified as a regulated investment company.
The amount of such earnings and profits per share of Company Shares is estimated
to be $1.59. If the Company distributes in 1999 an amount in excess of its 1999
net investment income and net realized capital gain, then you will be treated as
receiving in 1999 a dividend to the extent you receive a distribution of such
accumulated earnings and profits in 1999. On the other hand, to the extent that
all or a portion of the Company's accumulated earnings and profits is not
distributed in 1999 but rather in January 2000, then you will be treated as
receiving a dividend in 2000.
If you receive distributions that are in excess of the Company's net
investment income, net realized capital gain, and accumulated earnings and
profits, then such excess distributions may produce additional gain with respect
to your stock in the Company. The amount of such excess distributions will first
reduce your adjusted federal tax basis in your Company Shares (but not below
zero). The amount by which the excess distributions are greater than your
adjusted basis in your Company Shares will be treated as gain with respect to
your Company Shares, which will be capital gain if you hold such stock as a
capital asset and will be long-term or short-term depending on whether you have
held such stock for more than one year as of the date of distribution.
You should consult with your individual tax advisors to make sure that the
number you are using for your federal adjusted tax basis in your Company Shares
accurately reflects all relevant items. In particular, the tax basis in your
Company Shares will generally have been increased by any amounts reinvested by
you, including capital gains that were designated by the Company for inclusion
in your income but not actually distributed to you: such designated capital
gains are deemed to be reinvested by you. The table below shows the amounts per
share (adjusted for the 1983 and 1988 stock splits) that the Company designated
as capital gains for the years 1971 through 1987; since 1988 the Company has not
designated any such capital gains.
30 FEDERAL INCOME TAX CONSEQUENCES OF
THE PLAN
<PAGE>
Year Per Share
---- ---------
1971 $0.0748528
1972 0.0437261
1973 0.0572323
1974 0.0193103
1975 0.0172390
1976 0.0157778
1977 0.0127930
1978 ---
1979 0.1071930
1980 0.1022223
1981 0.1042167
1982 0.3931667
1983 0.6660500
1984 1.2952000
1985 0.9652000
1986 1.3163500
1987 1.3997000
After the Company has made all distributions as part of the Plan, you will
own stock in the Company, which intends to be treated for tax purposes as a C
corporation after December 31, 1999. The principal asset of the Company after
the Plan has been completed is expected to be Levco, the fair value of which as
of May 31, 1999 has been determined by the Company's board of directors to be
$95 million, or about $2.43 per share, assuming the proposed repayment of $20
million of Levco's debt to the Company. At that point, your adjusted federal tax
basis in your Company Shares will have been reduced, as described above, by the
amounts of cash and CTO Shares received by you to the extent such amounts are
greater than the Company's net investment income and net realized capital gain
and its accumulated earnings and profits.
A subsequent sale or exchange of Company Shares will produce taxable gain
or loss measured by the excess, or deficit, as the case may be, of the amount
realized minus your adjusted tax basis in such stock. Such gain or loss will be
long-term capital gain if the stock has been held as a capital asset for more
than one year. However, if you receive a capital gain distribution that includes
long-term capital gains, and you have held Company Shares for 6 months or less,
then any loss on the sale or exchange of your Company Shares will be treated as
long-term capital loss to the extent of the long-term capital gain that was
distributed to you.
Termination of Regulated Investment Company Status
The Company intends to be treated as a C corporation after December 31,
1999. For tax periods beginning after that date, it will cease complying with
the special tax rules applicable to regulated investment companies, including
the requirements that have caused it to make distributions of substantially all
of its net investment income and
31 FEDERAL INCOME TAX CONSEQUENCES OF
THE PLAN
<PAGE>
net realized capital gain in prior taxable years. Thus, the Company does not
expect to pay significant dividends, if any, to its shareholders in taxable
years after December 31, 1999.
Among other things, treatment as a C corporation means that the Company
will be taxable on its income and gains regardless of whether it distributes
dividends to you. Furthermore, any distributions by the Company to you with
respect to tax periods after December 31, 1999, will be treated as dividends to
the extent of the Company's current or accumulated earnings and profits at such
time, then as a return of capital to the extent of your basis in Company stock,
and finally as an amount received by you in exchange for your Company stock
which will be capital gain if you hold such stock as a capital asset and will be
long-term or short-term depending on whether you have held such stock for more
than one year as of the date of distribution.
Examples
The following examples show the effects of certain hypothetical
distributions and subsequent sales with respect to two shareholders, one having
an adjusted tax basis in Company Shares in the amount of $4.00 at the
commencement of the distributions, and the other with an adjusted tax basis in
the amount of $18.00. The adjusted tax basis in Company Shares will include
amounts distributed (or deemed distributed) that were reinvested in the Company.
In each case below, the shareholders are assumed to be subject to an effective
combined 25% rate of tax (federal and state) with respect to long-term capital
gains and an effective combined 45% rate of tax (federal and state) with respect
to ordinary income and short-term capital gains. However, the amount distributed
by the Company to a shareholder arising out of the Company's sales of securities
will reflect the character of such sales in the Company's hands, and will be a
mixture of short-term and long-term capital gains and losses taxed accordingly.
The examples are illustrative only and have been prepared using the number of
shares and the amounts of per-share distributions assuming the Company's
securities were sold at their estimated values as of May 31, 1999, before the
proposed reverse stock split. The amounts actually distributed will depend on
each security's value as of the date of the actual distribution. You should
consult your own tax advisor to determine the federal, state, and local tax
consequences of receiving distributions as part of the Plan and holding Company
Shares in light of your unique circumstances.
32 FEDERAL INCOME TAX CONSEQUENCES OF
THE PLAN
<PAGE>
<TABLE>
<S> <C> <C> <C>
Shareholder basis in BKF stock $ 4.00 $18.00
Cash distributed $16.56
CTO Shares distributed 1.92
Total cash and CTO share distributed 18.48 18.48
Gains from sales of securities 5.54
Gain from CTO distribution 1.79
Earnings and profits ("E&P") 1.59
Total gain/E&P distributed 8.92 8.92
Excess of distribution over gain and E&P 9.56 9.56
Excess of distribution over basis 5.56 N/A
Shareholder taxes with respect to:
Gains from securities sales 1.74 1.74
Gains from CTO Shares distribution 0.45 0.45
Earnings & profits 0.71 0.71
Excess of distribution over tax basis 1.39 0.00
Total tax from distributions 4.29 2.90
Basis in BKF stock after distributions
(original basis minus "Excess of distribution
over gain and E&P" above, but not less than zero) 0.00 8.44
Value of BKF (Levco) 2.43 2.43
Gain or loss upon later sale 2.43 (6.01)
</TABLE>
The table in Appendix E extrapolates parts of this example for a wider
range of shareholder bases.
RISKS RELATING TO THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN
Trading of Company Shares After the Distribution
The Company Shares currently trade on the NYSE under the trading symbol
"BKF." After the liquidation of the private and public portfolios of the Company
and the distributions of the net proceeds of these sales and of the CTO Shares,
the Company's value will be substantially lower. Accordingly, the Company
expects that the trading price range of the Company Shares immediately after
each distribution will be substantially lower than the trading price range of
the Company Shares prior to the distribution. (This may be true even if
shareholders approve the reverse stock split. For more information on this
proposal, see "Approval of Amendment to the Certificate of Incorporation of
Baker, Fentress & Company".)
The combined trading prices of the Company Shares and the CTO Shares held
by Company shareholders after the distribution plus the cash the Company has
distributed to shareholders may be less than or greater than the trading price
of the
33 FEDERAL INCOME TAX CONSEQUENCES OF
THE PLAN
<PAGE>
Company Shares prior to the distribution, and may be less than the per share
value at which the Company has included Levin Management in computations of net
asset value per share. The marketplace will determine the prices at which the
Company Shares trade before and after the distribution. The depth and liquidity
of the market for the Company Shares, investor perception of the Company, Levco
and the investment management industry, the Company's operating results (which
will be almost entirely a function of Levco's operating results), the Company's
dividend policy and general economic and market conditions may or may not
influence the market's determination of the price of the Company Shares.
Dependence on Key Personnel
Levco is dependent on the efforts of Mr. Levin, its chairman and chief
executive officer, and Mr. Kigner, its co-chairman and chief investment officer
and principal portfolio manager for a majority of Levco's assets under
management. The loss of Mr. Levin's or Mr. Kigner's services, or their
incapacitation, could have a material adverse effect on Levco and the Company
because it could jeopardize Levco's relationships with its clients and result in
the loss of those accounts.
Mr. Levin has an employment contract with the Company and Levin Management
and Mr. Kigner has an employment contract with Levin Management. Messrs. Levin
and Kigner entered into their employment contracts at the time the Company
acquired Levco. Mr. Levin's and Mr. Kigner's contracts began on June 27, 1996.
Mr. Levin's contract has a term of five years, while Mr. Kigner's has a term of
four years. Each of the employment contracts contains confidentiality and
noncompetition provisions. Each contract also contains provisions that require
the Company or Levin Management to pay either individual if the Company or Levin
Management terminates his employment without cause (as defined in the contract).
The Company, Levin Management and Messrs. Levin and Kigner must seek arbitration
for any disputes brought under the contracts. There can be no assurance that
either Mr. Levin or Mr. Kigner will renew his contract after the expiration of
the terms and the loss of either could have a material adverse effect on Levco
and the Company.
Levco's future success also depends on its ability to retain and attract
other qualified personnel to conduct its investment management business. The
market for qualified portfolio managers is highly competitive and has grown more
so in recent years as the entire industry has experienced growth. To the extent
that Levco further diversifies its products and strategies, Levco anticipates
that it will be necessary for it to add portfolio managers and investment
analysts. There can be no assurance that Levco will succeed in its efforts to
recruit and retain the required personnel. The loss of key personnel or the
inability to recruit and retain qualified portfolio managers and marketing
personnel could have a material adverse effect on the Company's business.
In December 1998, the Company (after approval by shareholders) adopted an
incentive compensation plan to give the Company and Levco the ability to
attract and
RISKS RELATING TO THE PLAN
34
<PAGE>
retain talented professionals with equity-based and cash compensation. If the
price of the Company stock decreases after the consummation of the Plan, there
can be no assurance that the equity-based compensation will serve its purpose to
attract and keep these professionals. In addition, any equity-based compensation
that the Company awards under the incentive compensation plan could have the
effect of diluting current shareholder's interest in the Company. Currently,
there is no equity-based compensation outstanding.
Potential Adverse Effects on the Company's Performance Prospects from a
Decline in the Performance of the Securities Markets
Levco's operations are affected by many economic factors, including the
performance of the securities markets. During recent years, unusually favorable
and sustained performance of the U.S. securities markets, and the U.S. equity
market in particular, has attracted substantial inflows of new investments in
these markets and has contributed to significant market appreciation. This, in
turn, has led to an increase in assets under management and revenues for Levco.
More recently, the securities markets have experienced significant volatility.
Declines in the securities markets, in general, and the equity markets, in
particular, would likely reduce Levco's assets under management and consequently
reduce Levco's revenues. In addition, any continuing decline in the equity
markets, failure of these markets to sustain their prior rates of growth, or
continued volatility in these markets could result in investors withdrawing from
the equity markets or decreasing their rate of investment, either of which would
likely adversely affect Levco. Levco's rates of growth in assets under
management and revenues have varied from year to year, and there can be no
assurance that the growth rates sustained in the past will continue. Levco is
generally a "value" manager, meaning that its primary investment strategy is to
invest in stocks it believes are relatively undervalued. A general decline in
the performance of value securities could have an adverse effect on Levco's
revenues, and, in turn, impact the revenues of the Company. In addition, in
recent years value stocks have underperformed other types of securities and
there can be no assurance that this trend will not continue or worsen. Levco
also offers an event-driven, risk arbitrage product. A failure to effect its
risk arbitrage strategy in an efficient manner could likewise impact the
revenues of the Company.
Future Investment Performance
Success in the investment management industry depends largely on investment
performance. Good performance generally stimulates sales of Levco's services and
investment products and tends to keep withdrawals and redemptions low. This
generates higher management fees because such fees are based on the amount of
assets under management, and sometimes on investment performance. On the other
hand, relatively poor performance tends to result in decreased sales, decreased
assets under management, and the loss of accounts, with corresponding decreases
in revenue.
35 RISKS RELATING TO THE PLAN
<PAGE>
Shown below is historical information about the performance that Levco's
accounts have achieved as a whole as compared to the Russell 1000 Value Index
and the Standard & Poor's 500 Stock Index. The Russell 1000 Value Index measures
the performance of those companies in the Russell 1000 Index (which includes the
largest 1000 U.S. companies based on total market capitalization) with lower
price/book ratios and lower forecasted growth rates. The S&P 500 Index is a
broad-based, unmanaged market-weighted index of 500 U.S. companies.
Comparison of Annual Returns
----------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Levco Composite (net) 15.87% 22.99% 21.02% 32.64% 0.90% 13.62% 14.06%
Russell 1000 Value Index 15.63 35.18 21.64 38.35 (1.99) 18.12 13.81
S&P 500 Index 28.58 33.36 22.96 37.58 1.30 10.06 7.62
Since
1991 1990 1989 1988 1987 1986 1986
---- ---- ---- ---- ---- ---- ----
Levco Composite (net) 24.89% (3.08)% 29.71% 22.47% 12.77% 14.79% 644.60%
Russell 1000 Value Index 24.61 (8.08) 25.19 23.16 0.50 19.98 638.00
S&P 500 Index 30.45 (3.14) 31.65 16.57 5.22 18.70 742.90
</TABLE>
Past performance is not indicative of future results.
The Notes are an integral part hereof.
Notes to Comparison of Annual Returns
- -------------------------------------
Basis of Presentation: Richard A. Eisner & Company, LLP examined the investment
performance results for the Levco composite for the years 1986 through 1995 and
1998. Ernst & Young LLP examined the investment performance results for the
period 1/1/96 through 12/31/97. For the periods through 6/30/96, performance is
that of Levco's predecessor.
The investment performance results have been prepared and presented in
compliance with the Association for Investment Management and Research ("AIMR")
Performance Presentation Standards from January 1, 1993 through December 31,
1998. The full period is not in compliance because, for periods prior to January
1, 1993, size-weighted composite returns were calculated using end-of-period
market values. Additionally, the presentation does not include the standard
deviation measure of dispersion for periods prior to January 1, 1993. AIMR has
not been involved with the preparation or review of this report.
Managed Accounts: Levco's composite includes all accounts managed on a fully
discretionary basis, including taxable and tax-exempt accounts, except:
immediate family and related accounts, accounts with assets under $1,000,000,
one account for which only the equity portion of the portfolio is managed, all
investment partnerships of which affiliates serve as general partners and
similarly managed accounts which utilize investment strategies different from
the accounts included in the composite and accounts managed under a broker
sponsored wrap-fee program. The excluded accounts comprise 35% of Levco's assets
under management. A complete list and description of all of Levco's composite
accounts is available upon request.
Calculation of Performance: For the period from 1986 through 1989, the results
shown above reflect the deduction of a 1% investment management fee payable
quarterly at a rate of .25% of ending market value. This is the maximum
investment management fee charged by Levco. These results do not reflect actual
fees charged. For the periods from January 1, 1990, the net results shown above
reflect the deduction of the actual dollar-weighted fee rate paid by all
accounts in the composite. Levco has calculated the dollar-weighted fee rate by
dividing the quarterly investment management fees paid by the accounts in the
composite by the total composite asset value. This dollar-weighted fee rate also
includes the performance fees paid by certain accounts. Inclusion of the
performance-based fees does not materially affect the dollar-weighted fee rate.
36 RISKS RELATING TO THE PLAN
<PAGE>
Success in the investment management industry also depends on the ability
of an investment manager, and third parties with whom the investment manager
contracts, to successfully perform administrative, back-office and trade
execution functions. A failure by Levco or a third party contracted by Levco to
perform such functions could impact the revenues of Levco, which, in turn, could
impact the revenues of the Company.
Loss of Significant Accounts
Levco had approximately 640 accounts (counting each wrap fee program as a
single account) as of May 31, 1999, of which the ten largest accounts, excluding
the Company, generated approximately $13.4 million of revenues for Levco in
1998, or approximately 35.4% of Levin Management's total revenues during 1998.
The portion of the Company's capital that comprised the public portfolio
generated approximately $1.5 million in revenues for Levco in 1998, which was
approximately 3.6% of total revenues. While Levco does not anticipate the loss
of any of these accounts, other than the Company's account, such a loss would
have an adverse effect on Levco's revenues, which, in turn, would affect
adversely the Company.
Levco's Fees and Investment Contracts
Some segments of the investment management industry have experienced a
trend toward lower management fees. Levco must maintain a level of investment
returns and service that is acceptable to clients given the current fees they
pay Levco. There can be no assurance that, after the Company completes the
transactions the Plan contemplates, Levco will be able to maintain its current
fee structure or client base. Reduction of the fees for new or existing clients
could have an adverse impact on Levco's profits and, as a result, adversely
impact the Company's results.
Moreover, Levco derives almost all of its revenue from investment
management agreements. For investment companies, a majority of the disinterested
members of each fund's board must approve these agreements at least annually and
the agreements are terminable without penalty on 60 days' notice. Levco's
agreements with its separately-managed account clients generally are terminable
by the client without penalty and with little or no notice. Any failure to
renew, or termination of, a significant number of these agreements could have a
material adverse effect on Levco and the Company.
Levco, through Levco GP, also derives revenue from the Levco Partnerships'
incentive fees. Good performance of the Levco Partnerships generates higher
incentive fees because those fees are based on the performance of the assets
under management. On the other hand, relatively poor performance will result in
lower or no incentive fees, and will tend to lead to decreased assets under
management and the loss of accounts, with corresponding decreases in revenue.
Competition
37 RISKS RELATING TO THE PLAN
<PAGE>
The investment management business is highly competitive. Levco
competes with a large number of domestic and foreign investment management
firms, commercial banks, insurance companies, broker-dealers and other firms
offering comparable investment services. Many of the financial services
companies with which Levco competes have greater resources and assets under
management than Levco and offer a broader array of investment products and
services.
Levco believes that the most important factors affecting its ability to
attract and retain clients are the abilities, performance records and
reputations of its portfolio managers, the ability to hire and retain key
investment personnel, the attractiveness of investment strategies to potential
investors and competitiveness in fees and investor service. Levco's ability to
increase and retain client assets could be adversely affected if client accounts
underperform client expectations, or if key investment personnel leave Levco.
The ability of Levco to compete with other investment management firms also
depends, in part, on the relative attractiveness of its investment philosophies
and methods under prevailing market conditions. The absence of significant
barriers to entry by new investment management firms in the institutional
managed accounts business increases competitive pressure.
Dependence on Information Systems; Year 2000
Levco is highly dependent on information systems and technology. It
depends, to a great extent, on third parties who are responsible for managing,
maintaining and updating the systems. There can be no assurance that Levco's
current systems will continue to be able to accommodate Levco's growth or that
the costs of its outsourcing arrangements will not increase. Such a failure to
accommodate growth or an increase in costs could have a material adverse effect
on Levco and the Company.
Some of today's computer systems cannot process date-related
information because they are not programmed to distinguish between the year 2000
and the year 1900 (commonly referred to as the Year 2000 problem or Y2K).
Because Levco is highly dependent on its information systems and technology, the
failure of its internal computer systems to be Year 2000 compliant could have a
material adverse impact on Levco and the Company. For example, such a failure
could lead to incomplete or inaccurate recording of trades in securities or
result in the generation of erroneous financial reports. This, if not remedied,
could cause business interruptions, financial loss, regulatory actions,
reputational harm and legal liability.
Levco also depends on the proper functioning of third-party computer
and non-information technology systems. These third parties include financial
intermediaries, such as stock exchanges, depositories, clearing agencies,
clearing houses and commercial banks. If these third parties have Year 2000
problems that are not remedied, Levco could experience numerous operating
difficulties including, for example: disruption of critical administration and
record-keeping services, disruptions of electrical services or
telecommunications capabilities, receipt of inaccurate data information
RISK RELATING TO THE PLAN
38
<PAGE>
which may lead to inaccurate pricing of securities, failed trade settlements,
inability to trade in certain markets, disruption of capital flows resulting in
a stress on liquidity, financial and accounting difficulties that expose the
Company to increased credit risk and loss of business.
In seeking to become Year 2000 compliant, Levco has been implementing a
written compliance plan involving (i) a full assessment of computer hardware and
software, electronic equipment and physical facilities, (ii) the correction of
deficiencies, (iii) the testing of systems and (iv) the development of
contingency plans. Both the development and implementation of the plan have been
executed by firm personnel working with external consultants. Although Levco has
taken numerous steps toward becoming Year 2000 compliant in its own technology
systems and has taken steps to ensure that its vendors and service providers are
also Year 2000 compliant, there can be no assurance that the Year 2000 program
will be effective. Levco has filed reports with the Securities and Exchange
Commission regarding the status of its Year 2000 compliance program on Form
ADV-Y2K and on Form BD-Y2K.
The Company's distributions under the Plan likely will occur during
late 1999 and early 2000. Due to the uncertainties surrounding the Year 2000
problem, the prices of the Company's portfolio securities may fluctuate greatly
in response to increasing concerns about the Year 2000 problem and the possible
movement by investors into more liquid assets (such as cash). Thus, there can be
no assurance that the Year 2000 problem will not negatively impact the prices at
which the Company sells its portfolio securities.
Conflicts of Interest
Levco's officers, directors and employees may from time to time own
securities which one or more of its clients also own. Levco maintains internal
policies with respect to individual investments by its officers, directors and
employees which require them to report securities transactions and restrict
certain transactions so as to minimize possible conflicts of interest.
Regulation
Virtually all aspects of the Levco Companies' business are subject to
various federal and state laws and regulations. Levco is registered with the
Commission under the Investment Advisers Act of 1940 (the "Advisers Act"), and
believes it is in compliance with applicable state securities notification
requirements. The Advisers Act imposes numerous obligations on registered
investment advisers, including fiduciary, recordkeeping, operational and
disclosure obligations. In addition, Levco is registered with the Commodity
Futures Trading Commission as a commodity trading advisor and a commodity pool
operator and Levco GP is registered with that agency as a commodity pool
operator. Levco and Levco GP are members of the National Futures Association.
LEVCO Securities is registered as a broker-dealer under the Exchange Act, is a
member of the National Association of Securities Dealers, Inc. and is a member
of the Municipal Securities Rulemaking Board. In addition, Levco is subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and
its regulations insofar as it is a "fiduciary" under ERISA with respect to
certain clients.
These laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict the
Levco Companies from conducting their business if they fail to comply with these
laws and
RISK RELATING TO THE PLAN
39
<PAGE>
regulations. If the Levco Companies fail to comply with the laws and
regulations, these agencies may impose sanctions, including the suspension of
individual employees, limitations on business activities for specified periods
of time, revocation of registration, and other censures and fines. Changes in
these laws or regulations could have a material adverse affect on the
profitability and mode of operations of the Levco Companies.
Certain Legal Requirements
The Company's Board and management believe that the Company will be
solvent at the time of the distribution of cash and CTO Shares, will be able to
repay its debts as they mature and will have sufficient capital to carry on its
businesses. However, if as a result of a legal action by an unpaid creditor, a
court were to find that, at the time the Company effected the distribution, the
Company (i) was insolvent, (ii) was rendered insolvent by reason of the
distribution, or (iii) believed it would incur debts beyond its ability to pay
the debts as they matured, such court could void the distribution of cash or CTO
Shares (in whole or in part) and require that the shareholders return the
special dividend of cash or CTO Shares (in whole or in part) to the Company, or
require the Company, as the case may be, to fund certain liabilities for the
benefit of creditors. In addition, the Company's Board also believes that the
distributions of cash and CTO Shares will comply with applicable dividend laws.
However, if, as a result of a legal action, a court were to find that the
Company made the distributions in violation of laws restricting dividends,
consequences similar to those described above could result.
PLAN EFFECTIVE DATE; MODIFICATION OF PLAN; SHAREHOLDER APPROVAL
The Board preliminarily adopted the outline of the Plan on May 6, 1999
and approved the final form of the Plan on June 17, 1999. If the Company's
shareholders approve the Plan, the Board will take the steps necessary to
implement the Plan. If shareholders do not approve the Plan, the Board will
continue to operate the Company as a closed-end investment company in accordance
with the Company's current investment restrictions.
Conditions; Termination. Shareholders must approve the Plan in its
entirety. In addition, the Company's Board has retained discretion, even if
shareholder approval of the Plan is obtained, to abandon, defer or modify the
Plan or any matter contemplated by the Plan. However, if the Board takes any
such action, it will do so on the basis that such action will be in the best
interests of the Company and its shareholders.
Recommendation
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PLAN FOR DISTRIBUTION
OF ASSETS OF BAKER, FENTRESS & COMPANY.
RISK RELATING TO THE PLAN
40
<PAGE>
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF
BAKER, FENTRESS & COMPANY
- --------------------------------------------------------------------------------
The Board has approved a proposal to amend the Company's Restated
Certificate of Incorporation authorizing the Company, subject to shareholder
approval, to effect a reverse stock split of the Company's outstanding shares of
common stock, by reclassifying each six outstanding shares of common stock held
(your "Company Shares") into one share of new common stock (called the "New
Common Stock"). The proposed certificate of amendment is in the form attached to
this Proxy Statement as Appendix F. Approval of the amendment to the Certificate
of Incorporation by shareholders requires the affirmative vote of the holders of
a majority of the outstanding shares of the common stock.
General
The Company is currently authorized to issue up to 60,000,000 shares of
common stock, par value $1.00 per share. This proposal will effect a reverse
stock split on the basis of one share of New Common Stock for each six
outstanding Company Shares.
The proposal is conditioned upon shareholder approval and consummation
of the Plan. If shareholders do not approve the Plan or the Plan is not
otherwise consummated, the Company will not amend the Certificate of
Incorporation to effect the reverse stock split. The amendment to the
Certificate of Incorporation will not occur until after the Company has
completed the final distribution under the Plan. The Company expects that this
will occur during the first quarter of 2000. Pending this reverse stock split,
the Company anticipates that the net asset value and the trading price of the
Company Shares will decline as a result of the distributions of cash and CTO
Shares.
Reasons For The Reverse Stock Split
If shareholders approve the Plan set forth under the first proposal,
the Company's market price per share likely will decline, approximately in
proportion to the amount of assets that the Company distributes. For example, if
the Company's stock trades in the market after the distribution at exactly the
value at which the Company valued Levin Management as of May 31, 1999, the per
share price will be $2.43 (if the Levco Companies borrow $20.0 million of debt,
with the proceeds used in partial repayment of the Company's loan to Levin
Management and the remainder of the loan converted by the Company to equity of
Levin Management) or $2.95 (if the entire loan is converted by the Company to
equity of Levin Management). This is an illustration only - not a prediction or
a promise, and is subject to change based on the amount of leverage to which the
Company is subject. As described above, the market will determine the trading
price for the Company's stock, which may be less or more than this amount.
The Board believes the reverse stock split is desirable for several
reasons. The reverse stock split is intended to increase the acceptance of the
Company's stock by
41
<PAGE>
the financial community and the investing public and, accordingly, could enhance
your value.
The reverse stock split will decrease the number of shares outstanding
and presumably increase the per-share market price for the New Common Stock. The
Company is currently quoted on the NYSE, which has adopted certain criteria that
the Company is required to meet. Although the Company currently meets all
criteria applicable to it, if its price falls below a certain level, the NYSE
could consider delisting the Company.
Theoretically, the per-share market price should not, by itself, affect
the marketability of the stock, the type of investor who acquires it, or the
Company's reputation in the financial community, but in practice this is not
necessarily the case. Many institutional and other investors look upon stocks
trading below $10.00 as being unduly speculative in nature or having greater
volatility or larger bid/ask spreads as a percentage of value and, as a matter
of policy, avoid investment in those stocks.
Moreover, some brokerage firms are reluctant to recommend lower-priced
securities to their clients or lend money to their clients to purchase low-
priced securities. Certain brokerage house policies also may tend to discourage
individual brokers within firms from dealing in lower-priced stocks. Some of
those policies and practices pertain to the payment of brokers' commissions and
to time-consuming procedures that make the handling of lower-priced stocks
unattractive to brokers from an economic standpoint. In addition, the structure
of trading commissions tends to have an adverse impact upon retail holders of
lower-priced stocks because the brokerage commission on a sale of a lower-priced
stock generally represents a higher percentage of the sales price than the
commission on a relatively higher-priced issue.
Although there can be no assurance that the price of the Company's
shares after the reverse split will actually increase in an amount proportionate
to the decrease in the number of outstanding shares, the proposal is intended to
result in a price level for the New Common Stock that will broaden investor
interest and provide a market that will reflect more closely the Company's
underlying value.
There can be no assurance that any or all of these results will occur,
including, without limitation, that the market price per share of New Common
Stock after the reverse stock split will be six times the market price per share
of Company Shares before the reverse stock split, or that the new price will
either exceed or remain in excess of the current market price. Further, there is
no assurance that the market for the New Common Stock will reflect more closely
the Company's underlying value. You should note that the Board cannot predict
how the reverse stock split will affect the market price of Company Shares. If
shareholders approve the Plan but do not approve this proposal to amend the
Certificate of Incorporation, there can be no assurance that the price of the
Company's stock will remain high enough to prevent the effects outlined above.
REVERSE STOCK SPLIT
42
<PAGE>
Company Shares currently are listed for trading on the NYSE under the
trading symbol "BKF", and the New Common Stock is expected to be listed for
trading on the NYSE under the same symbol.
Principal Effects of the Reverse Stock Split
The principal effects of the reverse stock split will be:
1. Based upon the 39,029,101 Company Shares currently outstanding
(which is likely to be unchanged as of the record date), the
adoption of the reverse stock split proposal will decrease the
outstanding shares of common stock by approximately 84% and
thereafter approximately 6.5 million shares of New Common Stock
will be outstanding. However, the actual numbers may change
because the Company will not effect the reverse split until after
it completes its distribution of assets under the Plan.
2. The Company will not decrease the amount of its authorized common
stock. If shareholders adopt this proposal, the New Common Stock
issued and outstanding will represent approximately 11% of the
Company's authorized common stock whereas Company Shares
currently issued and outstanding represent approximately 65% of
the authorized common stock. After giving effect to this
proposal, the Board will be able to issue approximately 53.5
million shares of New Common Stock in the future without further
action by the shareholders. The Company does not currently plan
to issue shares of common stock except in connection with
employee incentive compensation plans and possible acquisitions;
however, any such issuance likely will have the effect of
diluting current shareholders' proportionate interest in the
Company.
3. Unissued and unreserved New Common Stock will enable the Board to
issue shares to persons friendly to current management. This
could render more difficult or discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of the
Company's management and possibly deprive the shareholders of
opportunities to sell their shares of the Company at prices
higher than prevailing market prices. Such additional shares also
could be used to dilute the stock ownership of current and future
shareholders of the Company.
4. If approved and implemented, the proposal is likely to leave some
shareholders with "odd lots" of New Common Stock (i.e., stock in
amounts of less than 100 shares). These odd lots may be more
difficult to sell, or require greater transaction costs per share
to sell, than shares in even multiples of 100.
PRINCIPAL EFFECTS OF REVERSE STOCK SPLIT
43
<PAGE>
If this proposal is approved, the Company will file the Certificate of
Amendment amending the Certificate of Incorporation with the Secretary of State
of Delaware as soon as practicable after the date of the Company's last
distribution under the Plan. The reverse stock split will become effective as of
the close of business on the date of such filing.
Exchange of Stock Certificates and Elimination of Fractional Share Interests
As soon as practicable after the Certificate of Amendment is filed with
the Secretary of State of Delaware (called the "Effective Time"), the Company
will notify you and request that you surrender your Company Shares for new
certificates that will represent the number of shares of New Common Stock after
the reverse stock split. Until so surrendered, each current certificate
representing shares of Company Shares will be deemed for all corporate purposes
after such Effective Time to evidence ownership of shares of New Common Stock in
the appropriately reduced number. However, until you exchange your certificates,
as described below, the Company (or its exchange agent) will hold all dividends
or other distributions that may be payable to holders of record and will not pay
any interest on these held dividends or distributions.
ChaseMellon Shareholder Services, LLC will be appointed exchange agent
(the "Exchange Agent") to act for you in effecting the exchange of your
certificates. The Exchange Agent will furnish shareholders of record at the
Effective Time with the necessary materials and instructions advising them of
the procedure for surrendering stock certificates in exchange for new
certificates representing the ownership of New Common Stock. You will not have
to pay a transfer fee or other fee in connection with the exchange of
certificates unless, possibly, you ask for your certificates to be registered in
another name. YOU SHOULD NOT SUBMIT ANY CERTIFICATES FOR EXCHANGE UNTIL
REQUESTED TO DO SO.
The Company will not issue any fractional shares of New Common Stock.
In cases in which the reverse split will otherwise result in you holding a
fraction of a share, the Company will pay you for such fractional interest on
the basis of the average closing market price of the New Common Stock on the
NYSE for the ten trading days immediately following the day of the Effective
Time. Because the price of the Company Shares fluctuates, the Company cannot
determine the amount we will pay you for your fractional shares until the
Effective Time which may be greater or less than the price on the date that you
execute a proxy.
Upon your surrender of stock certificates representing Company Shares,
the Company will deliver certificates representing New Common Stock to you. At
the same time or as soon as possible thereafter, we will pay you cash (without
interest) for your fractional shares, if any.
If you have lost your certificate for Company Shares or it has been
destroyed or stolen, you will be entitled to issuance of a certificate
representing the shares of New Common Stock into which such shares will have
been converted upon compliance with
EXCHANGE OF STOCK CERTIFICATES AND
ELIMATION OF FRACTIONAL SHARE INTEREST
44
<PAGE>
such requirements as the Company and the Exchange Agent customarily apply in
connection with lost, stolen or destroyed certificates.
Shares held without certificates in Dividend Reinvestment Plan accounts
will be automatically exchanged for New Common Stock and cash for fractional
shares without your taking any action.
There were 2,437 shareholders of record of the Company as of the Record
Date. This proposal, if adopted, is not expected to cause a significant change
in the number of shareholders. The Company has no plans for the cancellation or
purchase of its shares from individuals holding a nominal number of such shares
if shareholders adopt the proposal.
Federal Income Tax Consequences
The following is a summary of the material federal income tax
consequences of the proposed reverse stock split, which will not occur until
after the Company has completed all distributions under the Plan. This summary
does not purport to be complete and does not address the tax consequences to
holders that are subject to special tax rules, such as banks, insurance
companies, regulated investment companies, personal holding companies, foreign
entities, nonresident alien individuals, broker-dealers and tax-exempt entities.
This summary is based on the Code, Treasury regulations promulgated under the
Code, and judicial and administrative interpretations of the Code and
regulations, all as in effect on the date of this Proxy Statement. These laws,
regulations, and interpretations all are subject to change and those changes may
be retroactive. This summary also assumes that the New Common Stock will be held
as a "capital asset" (generally, property held for investment) as defined in the
Code. You are advised to consult your own tax advisor regarding the federal
income tax consequences of the proposed reverse stock split in light of your
personal circumstances and the consequences under state, local and foreign tax
laws.
1. The reverse split will qualify as a recapitalization described in
Section 368(a)(1)(E) of the Code.
2. The Company will not recognize any gain or loss in connection with
the reverse split.
3. You will not recognize any gain or loss when you exchange all of
your Company Shares solely for shares of New Common Stock.
4. The aggregate basis of the shares of New Common Stock you will
receive in the reverse split (including any fractional share deemed
received) will be the same as the aggregate basis of the Company
Shares surrendered in exchange for the New Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
OF REVERSE STOCK SPLIT
45
<PAGE>
5. The holding period of the shares of New Common Stock you will
receive in the reverse split (including any fractional share deemed
received) will include the holding period of the Company Shares
surrendered in exchange for the New Common Stock.
6. If you receive cash in lieu of a fractional share, you will be
treated as receiving the payment in connection with a redemption of
the fractional share, and the IRS will determine the tax
consequences of the redemption under Section 302 of the Code.
The foregoing summary is included for general information only.
Accordingly, you are urged to consult with your own tax advisor with respect to
the tax consequences of the proposed reverse stock split, including the
application and effect of the laws of any state, municipal, foreign or other
taxing jurisdiction.
Recommendation
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE
CERTIFICATE OF INCORPORATION.
OTHER MATTERS
- --------------------------------------------------------------------------------
The management of the Company does not intend to bring any other
matters before the meeting, and it does not know of any proposals to be
presented to the meeting by others. If any other matter properly comes before
the meeting, however, the persons named in the proxy solicited by the Board will
vote thereon in accordance with their judgment.
INTERESTS IN STOCK
- --------------------------------------------------------------------------------
The table below contains information as of May 31, 1999 on the number
of shares of common stock of the Company and of its controlled affiliate,
Consolidated-Tomoka Land Co., as to which each named officer of the Company and
all directors and officers of the Company as a group, had outright ownership,
or, alone or with others, any power to vote or dispose of the shares, or to
direct the voting or disposition of the shares by others, and the percentage of
the aggregate of such shares to all of the outstanding shares of the respective
companies.
<TABLE>
<CAPTION>
Shares of Baker, Fentress & Company
-----------------------------------------------------------------------
Power Over Voting or
Outright Disposition of Other
Ownership Shares (a) Aggregate
------------------------ ------------------------
of Shares Alone Shared Shares Percent
----------- --------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Frederick S. Addy..................... 4,272 -- -- 4,272 0.01%
Bob D. Allen.......................... 3,051 -- -- 3,051 0.01
</TABLE>
INTEREST IN STOCK
46
<PAGE>
<TABLE>
<CAPTION>
Shares of Baker, Fentress & Company
--------------------------------------------------------------------
Power Over Voting or
Outright Disposition of Other
Ownership Shares (a) Aggregate
--------------------- -----------------------
of Shares Alone Shared Shares Percent
---------- ------ -------- --------- -------
<S> <C> <C> <C> <C> <C>
Eugene V. Fife........................ 6,145 -- -- 6,145 0.02
J. Barton Goodwin..................... -- -- 750,418 750,418 1.92
James P. Gorter....................... 129,332 21,805 430,900 582,037 1.49
David D. Grumhaus..................... 7,992 5,315 489,865 503,172 1.28
Jeffrey A. Kigner..................... 333,892 -- -- 333,892 0.86
John A. Levin......................... 3,602,133 -- 123,299 3,725,432 9.55
Burton G. Malkiel..................... -- -- 8,000 8,000 0.02
David D. Peterson..................... 26,926 -- -- 26,926 0.07
William H. Springer................... 5,000 -- -- 5,000 0.01
Dean J. Takahashi..................... 1,097 -- -- 1,097 0.00
James P. Koeneman..................... 1,326 1,230 454 3,010 0.01
Julie A. Heironimus................... -- -- 20 20 0.00
Scott E. Smith........................ 1,848 -- 4,075 5,923 0.02
---------- ------ --------- --------- -------
Directors and officers
as a group (15 persons)............ 4,115,691 28,350 1,807,031 5,951,072 15.26 (b)
<CAPTION>
Shares of Consolidated-Tomoka Land Co.
-----------------------------------------------------------------------
Power Over Voting or
Outright Disposition of Other
Ownership Shares (a) Aggregate
--------------------- -----------------------
of Shares Alone Shared Shares Percent
---------- ----- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Bob D. Allen........................... 111,540 (c) -- -- 111,540 (c) 1.72%
J. Barton Goodwin...................... -- -- 800 800 .01
James P. Gorter........................ 2,400 -- 4,000 6,400 .10
John A. Levin.......................... -- -- 36,844 36,844 .58
David D. Peterson...................... 4,000 -- -- 4,000 .06
---------- ----- ------ ------- -------
Directors and officers
as a group (15 persons)............. 117,940 (c) 41,644 159,584 (c) 2.47%
</TABLE>
_________________________
Notes to Tables:
(a) Each person disclaims beneficial ownership of such shares.
(b) Number has been rounded.
(c) Includes 42,400 shares subject to options held by Mr. Allen that were
exercisable within 60 days of May 31, 1999.
The following table contains information with respect to the
"beneficial ownership" (as defined by the Securities and Exchange Commission) of
shares of the Company's common stock, as of May 31, 1999, by each person (other
than Mr. Levin whose share ownership information is shown above) who is known by
management of the Company to beneficially own more than five percent of such
stock. Except as otherwise indicated by footnote, the person below has sole
voting and investment power over its shares.
EXECUTIVE OFFICERS
47
<PAGE>
Shares Beneficially
Name and Address Owned Percent
---------------- ----- -------
Yale University, Investments Office
230 Prospect Street 2,101,814* 5.39%
New Haven, CT 06511-2107
Attn: Dean J. Takahashi, Senior Director
*Does not include 1,097 shares owned by Mr. Takahashi, a Yale University
employee who is a member of the Board of Directors of the Company.
EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The current executive officers of the Company are listed below. The
Company expects that these persons will remain executive officers until its has
completed the Plan. At that time, the Company expects that certain of the
executive officers of Levco will become executive officers of the Company.
<TABLE>
<CAPTION>
Name, Age, and Principal Occupation Year First
Since January 1, 1993 Office(a) Elected
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James P. Gorter--age 69 Chairman of the Board 1987
Chairman of the Board of the Company; limited partner of Goldman Sachs
& Co. until May 1999.
John A. Levin--age 60 President and Chief 1996
President and Chief Executive Officer of the Company Executive Officer
and Chairman and Chief Executive Officer of Levin Management Co., Inc.
("Levin Management") and Levco since June 1996; prior thereto,
President and Securities Analyst/Portfolio Manager at John A. Levin &
Co., Inc., the predecessor to Levco,
James P. Koeneman--age 51 Executive Vice 1983
Executive Vice President and Secretary of the Company President
(administrative and financial officer) and Secretary
Scott E. Smith--age 45 Executive Vice 1989
Executive Vice President of the Company (portfolio manager--private President
placement and small cap portfolios)
Julie Heironimus--age 40 Treasurer and 1998
Treasurer and Assistant Secretary of the Company since April 1998; prior Assistant Secretary
thereto, senior accountant of the Company
</TABLE>
____________________
(a) Each officer of the Company generally holds office until the first
meeting of the Board after the annual meeting of shareholders and until
his or her successor is elected and qualified.
EXECUTIVE OFFICERS
48
<PAGE>
COMPENSATION
- --------------------------------------------------------------------------------
INCENTIVE COMPENSATION PLAN
On December 30, 1998, the shareholders of the Company approved an
incentive compensation plan to give the Company and Levco the ability to pay
certain individuals equity-based compensation. The new compensation plan allows
the Company and Levco to offer compensation based on the Company's stock and/or
Levin Management's stock, in addition to cash incentives and other
performance-based compensation. Excluding the automatic non-interested director
options (described below at "Directors' Compensation" and which each
non-interested Board member has forfeited), the Company has not granted any
stock-based compensation under the incentive compensation plan. It also does not
intend to grant any such stock-based compensation until after the consummation
of the transactions contemplated by the Plan or until after the date of the
Special Meeting if the shareholders do not approve the Plan.
DIRECTORS' COMPENSATION
Company employees who serve as directors of the Company receive no
additional compensation for such services. The Company pays non-employee
directors, including Levin Management employees or officers, an annual retainer
of $20,000 (the Chairman receives $32,000), payable in quarterly installments.
Non-employee directors receive $1,500 for each Board meeting and $500 for each
meeting of a committee of the Board that they attend in person or by telephone.
The Company also reimburses directors for their out-of-pocket expenses they
incur in connection with such meetings.
Under the incentive compensation plan, on December 30, 1998, the
Company granted each non-interested director a stock option to purchase 1,000
shares of the Company. On April 22, 1999, the Company granted another option to
each non-interested director to purchase 250 shares of the Company. The Board
believes that the two grants of options, although automatic under the incentive
compensation plan, were inappropriate in light of the proposal to adopt the
Plan, so each director of the Company voluntarily terminated his or her rights
to such shares of Company stock. No other options or equity-based compensation
have been granted to directors, and the Company does not intend to grant any
equity-based compensation under the incentive compensation plan until after the
consummation of the transactions contemplated by the Plan or until after the
date of the Special Meeting if the shareholders do not approve the Plan.
The following table sets forth compensation paid by the Company during
1998 to each of the directors of the Company for serving as directors of the
Company.
COMPENSATION
49
<PAGE>
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total
Compensation Benefits Accrued Compensation
from the as Part of the from the
Name of Person, Position Company Company's Expenses Company
- ------------------------ ------- ------------------ -------
<S> <C> <C> <C>
Frederick S. Addy............................. 29,000 none $29,000
Director
Bob D. Allen.................................. 26,000(a) none (a) 26,000 (a)
Director
Jessica M. Bibliowicz......................... 27,000(c) none (c) 27,000 (c)
Former Director
Eugene V. Fife................................ 28,500 none 28,500
Director
J. Barton Goodwin............................. 27,000 none 27,000
Director
James P. Gorter............................... 46,000(b) none 46,000 (b)
Chairman of the Board and Director
David D. Grumhaus............................. 28,000 none 28,000
Director
Jeffrey A. Kigner............................. 26,000(c) none (c) 26,000 (c)
Director
John A. Levin................................. 0(c) none (c) 0 (c)
President, Chief Executive Officer and
Director
Burton G. Malkiel............................. 28,500 none 28,500
Director
David D. Peterson............................. 29,500(b) none 29,500 (b)
Director
William H. Springer........................... 28,500 none 28,500
Director
Dean J. Takahashi............................. 26,000 none 26,000
Director
</TABLE>
______________
Notes to Directors' Compensation Table:
(a) In addition to the amounts shown, Mr. Allen receives compensation from
CTO, of which he is chairman of the board and president. Mr. Allen
participates in the CTO defined benefit pension plan funded by CTO.
Pension benefits payable under the CTO plan are based primarily on
years of service and the average compensation for the highest five
years during the final 10 years of employment. The benefit formula
generally provides for a life annuity benefit. The estimated annual
benefit payable under the Consolidated-Tomoka Land Co. plan upon
retirement at age 65 to a person with final average earnings of
$160,000 or more and 10 years of service would be approximately $27,042
annually. At December 31, 1998, Mr. Allen was expected to be credited
with eight years of service.
COMPENSATION
50
<PAGE>
(b) Mr. Gorter received compensation from CTO as a director of that company
until April 1999, when he ceased to be a CTO director. Mr. Peterson
receives compensation from CTO as a director of that company which is
in addition to the amounts shown.
(c) As described below in the Officers' Compensation - Summary Table, Mr.
Levin receives compensation from the Company for his services as an
officer of the Company, Mr. Kigner and Mr. Levin receive compensation
from Levin Management Co., Inc. for their services as officers and
employees of that company and its subsidiaries, and Ms. Bibliowicz
received compensation from Levin Management Co., Inc. for her services
as an officer and employee of that company and its subsidiaries, all of
which is in addition to the amounts shown in the Directors'
Compensation Table.
OFFICERS' COMPENSATION - SUMMARY TABLE
The following table sets forth compensation for the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996 received by the
Company's Chief Executive Officer, the Company's four other most highly
compensated executive officers serving at the end of fiscal year 1998 (each of
whom was paid in excess of $60,000 in aggregate compensation by the Company and
Levin Management) and Janet Sandona Jones and Todd H. Steele for whom disclosure
would have been required but for the fact that each resigned from the Company in
1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Annual Compensation
---------------------------------------------------------------------------
Name and All Other
Principal Position Year Salary Bonus Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John A. Levin 1998 $990,748(a) $1,614,706(b) $30,000(c)
---------------------------------------------------------------------------
Chief Executive Officer 1997 783,912(a) 1,711,658(b) 30,000(c)
---------------------------------------------------------------------------
And President 1996 375,177(a) 1,400,000(b) 30,000(c)
- --------------------------------------------------------------------------------------------------------------------
James P. Gorter 1998 0 0 64,000(d)
---------------------------------------------------------------------------
Chairman of the Board 1997 0 0 55,450(d)
---------------------------------------------------------------------------
1996 0 0 46,150(d)
- --------------------------------------------------------------------------------------------------------------------
James P. Koeneman 1998 160,000 85,000 36,126(e)
---------------------------------------------------------------------------
Executive Vice 1997 155,000 72,000 36,126(e)
---------------------------------------------------------------------------
President and Secretary 1996 149,000 74,450 36,068(e)
- --------------------------------------------------------------------------------------------------------------------
Scott E. Smith 1998 155,000 300,000 35,168(f)
---------------------------------------------------------------------------
Executive Vice 1997 150,000 125,000 35,168(f)
---------------------------------------------------------------------------
President 1996 145,400 82,270 35,168(f)
- --------------------------------------------------------------------------------------------------------------------
Janet Sandona Jones 1998 28,007 0 10,522(g)
---------------------------------------------------------------------------
Former Vice President 1997 81,000 32,000 31,940(g)
---------------------------------------------------------------------------
And Treasurer 1996 77,700 38,885 32,730(g)
- --------------------------------------------------------------------------------------------------------------------
Todd H. Steele 1998 26,042 0 6,868(h)
---------------------------------------------------------------------------
Former Vice President 1997 125,000 75,000 26,051(h)
---------------------------------------------------------------------------
1996 12,500 25,000 148(h)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) In 1998, Mr. Levin received $50,000 from the Company for serving as an
officer of the Company and $940,748 from Levin Management for serving
as an officer and director of that company; in 1997, Mr. Levin received
$50,000 from the Company for serving as an officer of the Company and
$733,912 from Levin Management for serving as an officer and director
of that company; in 1996, Mr. Levin received $25,000 from the Company
for serving as an officer of the Company and $350,177 from Levin
Management for serving as an officer and director of that company.
COMPENSATION
51
<PAGE>
(b) Amounts reported as bonuses for Mr. Levin are bonuses Levin Management
paid to Mr. Levin for serving as an officer and director of that
company and its subsidiaries.
(c) Amounts reported reflect contributions Levin Management paid to the
Levin Management Co., Inc. retirement plan, a money purchase pension
plan funded by employer contributions in which Mr. Levin participates.
The amount of the contribution made for each employee is determined by
a formula that takes into account, among other things, the age of the
employee for whom the contribution is made. The benefit received under
the Levin Management Co., Inc. retirement plan upon retirement depends
on the aggregate contributions to the plan for the participant and the
investment performance of those assets.
(d) The amount reported reflects the compensation Mr. Gorter received from
the Company for serving as a director of the Company ($46,000 in 1998,
$39,450 in 1997 and $30,150 in 1996) and compensation received for
serving as a director of Consolidated-Tomoka Land Co ($18,000). See
Directors' Compensation Table, above.
(e) The amount reported reflects the sum Mr. Koeneman received from Company
contributions to the money purchase pension plan ($30,000 in each
year), Company contributions to the defined benefit pension plan
($4,478 in 1998, $4,478 in 1997 and $4,478 in 1996) and Company
contributions to the life and disability plans ($1,648 in 1998, $1,648
in 1997 and $1,590 in 1996).
(f) The amount reported reflects the sum Mr. Smith received from Company
contributions to the money purchase pension plan ($30,000 in each
year), Company contributions to the defined benefit pension plan
($3,664 in 1998, $3,664 in 1997 and $3,664 in 1996) and Company
contributions to the life and disability plans ($1,504 in 1998, $1,504
in 1997 and $1,504 in 1996).
(g) The amount reported reflects the sum Ms. Jones received from Company
contributions to the money purchase pension plan ($7,002 in 1998,
$28,250 in 1997 and $29,146 in 1996), Company contributions to the
defined benefit pension plan ($2,804 in 1998, $2,804 in 1997 and $2,804
in 1996) and Company contributions to the life and disability plans
($716 in 1998, $886 in 1997 and $780 in 1996).
(h) The amount reported reflects the sum Mr. Steele received from Company
contributions to the money purchase pension plan ($6,510 in 1998,
$25,000 in 1997 and $0 in 1996) and Company contributions to the life
and disability plans ($358 in 1998, $1,051 in 1997 and $148 in 1996).
EMPLOYMENT CONTRACTS
Mr. Levin and Mr. Kigner each have employment contracts with the
Company or Levin Management, or both. These employment contracts are described
under the heading "RISK FACTORS RELATING TO THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED BY THE PLAN - Dependence on Key Personnel."
PENSION PLAN
The Company's officers and employees participate in the Company's
retirement plan, contributions to which are included in the cash compensation
table. The Company's retirement plan is a trusteed money purchase pension plan
funded by Company contributions equal to 25% of the compensation paid or accrued
to participating employees, subject to a $30,000 annual contribution limitation
per participant. The benefit received under the retirement plan upon retirement
depends on
COMPENSATION
52
<PAGE>
the aggregate contributions to the plan for the participant and the investment
performance of those assets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Pension or
Retirement
Benefits Accrued
as of 12/31/98
as Part of the
Name of Person Company's Expenses
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
James P. Gorter none
- ---------------------------------------------------------------------------------------------------------------------
John A. Levin none (a)
- ---------------------------------------------------------------------------------------------------------------------
James P. Koeneman $ 30,000
- ---------------------------------------------------------------------------------------------------------------------
Scott E. Smith 30,000
- ---------------------------------------------------------------------------------------------------------------------
Janet Sandona Jones 7,002
- ---------------------------------------------------------------------------------------------------------------------
Todd H. Steele 6,510
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Does not include Mr. Levin's participation in the Levin Management Co.,
Inc. Retirement Plan. See Note (c) under "Officers' Compensation -
Summary Table".
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board makes decisions on compensation
of the Company's executives. Each member of the Compensation Committee is a
non-employee director. The Committee establishes the compensation of John A.
Levin, Chief Executive Officer. His bonus is based on its evaluation of Mr.
Levin's performance in accordance with the requirements of the tax laws
contained in the Internal Revenue Code. It establishes the compensation of the
other officers of the Company in consultation with Mr. Levin. The full Board
reviews all decisions by the Compensation Committee relating to the compensation
of all the Company's officers.
The Company's executive compensation program reflects the philosophy
that compensation should reward executives for outstanding individual
performance and, at the same time, align the interests of executives closely
with those of shareholders. To implement that philosophy, the Company offers
each of its executives a combination of base salary and annual cash bonuses.
Each executive officer, with the exception of Mr. Levin, also participates in
the Company's Money Purchase Pension Plan. Through this compensation structure,
the Company aims to reward above-average corporate performance and recognize
individual initiative and achievements.
Base salaries reflect individual positions, responsibilities,
experience, and potential contribution to the success of the Company. Actual
salaries vary according to the Compensation Committee's subjective assessment of
a number of factors in its review of base salaries of Company executives. The
Committee conducts annual reviews to ensure that base salaries are competitive,
that they reflect the specific responsibilities of individual executives and
that they appropriately reward individual executives for their contributions to
the Company's performance.
EMPLOYMENT CONTRACTS/PENSION PLANS
53
<PAGE>
At the Committee's sole discretion, the Committee may pay each
executive officer a cash bonus based on the Compensation Committee's assessment
of the executive officer's individual performance and the performance of the
Company. In its evaluation of the performance of the officer and the
determination of incentive bonuses, the Committee does not assign quantitative
relative weights to different factors or follow mathematical formulas. Rather,
the Committee makes its determination in each case after considering the factors
it deems relevant at the time.
The executive compensation committee establishes the annual base salary
of the Chief Executive Officer. For 1998, the Company paid Mr. Levin $50,000 to
serve as the Company's Chief Executive Officer. Unlike the other executive
officers, Mr. Levin receives most of his compensation from Levin Management and
does not receive a cash bonus from the Company based on his individual or the
Company's performance.
For corporate income tax purposes, neither the Company nor Levin
Management may deduct executive compensation for certain persons in excess of $1
million, unless it is performance-based compensation and is paid pursuant to a
plan meeting certain requirements of the Code. The Committee currently
anticipates that, to the extent practicable and in the Company's best interest,
both the Company and Levin Management will pay executive compensation in a
manner that satisfies the requirements of the Code to permit deduction of the
compensation.
The Committee was responsible during 1998 for administering the Levin
Management Co., Inc. and Subsidiaries Key Employee Incentive Bonus Plan,
pursuant to which the Committee could award cash bonuses based on attainment of
specified performance goals. The Committee based Mr. Levin's bonus for 1998, as
reflected in the Officers' Compensation - Summary Table, on Levco's attainment
of any one of the following performance goals, relating to (i) the increase of
Levco's market share through the addition of new assets under management, (ii)
revenue less non-compensation related expenses, and (iii) performance of the
Levco core accounts compared to Standard & Poor's 500 Stock Index. During 1998,
Levco met two of the three performance goals.
Compensation Committee
Members
William H. Springer (Chairman)
Frederick S. Addy
David D. Peterson
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
In 1998, stockholder total return, which is based on the per share
market price of the Company, was 3.5%. Stockholder total return is the actual
return if all distributions had been reinvested during the year. It is based on
the Company's stock market price and calculated on a per share basis. During
1998, stockholder return did not correlate with the Company's portfolio
performance based on the Company's net asset value, reflecting the widening of
the discount. The chart below sets
COMPENSATION COMMITTEE REPORT
54
<PAGE>
forth a comparison of the Company's annual stockholder return with (i) the
annual stockholder return of closed-end investment companies ("Closed-End
Funds") reported by Morningstar, Inc.; and (ii) the annual stockholder return of
the S&P 500 Index. The chart is based on an investment of $100 on December 31,
1993, and assumes that all dividends and capital gain distributions were
reinvested. The chart is not an indicator of the future performance of the
Company. You should be particularly wary of extrapolating from this information
because, if shareholders approve the Plan, the Company will no longer be an
investment company. Thus, it should not be used to predict the future
performance of the Company's stock.
Comparison of Cumulative Five Year Total Return
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/93 12/31/94 12/30/95 12/29/96 12/31/97 12/31/98 6/30/99
- ---------------------------------------------------------------------------------------------------------------------
Baker, Fentress & Company $100 $93 $123 $142 $178 $184
- ---------------------------------------------------------------------------------------------------------------------
Closed-End Funds $100 $94 $123 $146 $196 $220
- ---------------------------------------------------------------------------------------------------------------------
S&P 500 Index $100 $101 $139 $171 $229 $294
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Total returns assume that dividends and capital gain distributions are
reinvested.
PROXY SOLICITATION; VOTING; ADJOURNMENT
- --------------------------------------------------------------------------------
If you properly sign your proxy and return it on time, your shares will
be voted at the Special Meeting in accordance with the directions you mark on
your proxy card. If you properly sign and return your proxy, but don't mark any
directions on it, your shares will be voted for the Plan for Distribution of
Assets of Baker, Fentress & Company and for the amendment to the Company's
Certificate of Incorporation.
You may revoke your proxy at any time before it is voted, either in
person at the meeting, by written notice to the Company, or by delivery of a
later dated proxy. You
PERFORMANCE GRAPH
55
<PAGE>
will not be entitled to appraisal rights for any action proposed to be taken at
the Special Meeting.
Shareholders of record at the close of business on June 30, 1999 are
entitled to participate in the meeting and to cast one vote for each share held.
The Company had __________ shares of common stock outstanding on the record
date. There is no other class of stock outstanding. Proxy material is first
being mailed to shareholders on or about July __, 1999.
Approval of each of the proposals requires the affirmative vote of more
than 50% of the outstanding shares.
Proxies will be solicited by mail. Proxies may be solicited by
directors, officers, and a small number of regular employees, personally or by
telephone, telegraph or mail, but such persons will not be specially compensated
for such services. In addition, the Company may engage Corporate Investor
Communications, Inc. to render proxy solicitation services at a cost estimated
at $5,000. The Company will inquire of any shareholder of record known to be a
broker, dealer, bank, or other nominee as to whether other persons were the
beneficial owners of shares held of record by such persons. If so, the Company
will supply additional copies of solicitation materials for forwarding to
beneficial owners and will make reimbursement for reasonable out-of-pocket
costs. The Company will bear all costs of solicitation and related actions.
ChaseMellon Shareholder Services, LLC, the Company's transfer agent,
tabulates the proxies. Under Delaware law (under which the Company is organized)
and the Company's bylaws, a majority of the shares outstanding on the Record
Date, excluding shares held in the Company's treasury, must be present at the
meeting in person or by proxy to constitute a quorum for the transaction of
business. Shares abstaining from voting or present but not voting, including
broker non-votes, are counted as "present" for purposes of determining the
existence of a quorum. Broker non-votes are shares held by a broker or nominee
for which an executed proxy is received by the Company, but which are not voted
as to one or more proposals because instructions have not been received from the
beneficial owners or persons entitled to vote and the broker or nominee does not
have discretionary voting power. For Proposals 1 and 2, a broker non-vote will
have the effect of a vote against these proposals.
Any decision to adjourn the meeting will be made by vote of the shares
present at the meeting, in person or by proxy. Proxies will be voted in favor of
adjournment if there are not enough shares present at the meeting to constitute
a quorum. If sufficient shares are present to constitute a quorum, but
insufficient votes have been cast in favor of an item to approve it, proxies
will be voted in favor of adjournment only if the Board determined that
adjournment and additional solicitation is reasonable and in the best interest
of shareholders, taking into account the nature of the proposal, the percentage
of votes actually cast, the percentage of negative votes, the nature of any
further
PROXY SOLICITATION; VOTING; ADJOURNMENT
56
<PAGE>
solicitation that might be made and the information provided to shareholders
about the reasons for additional solicitation.
The Company must receive any shareholder proposal to be considered for
inclusion in proxy material for the Company's annual meeting of shareholders in
April 2000 at the principal executive office of the Company (200 West Madison
Street, Chicago, Illinois 60606) no later than November 10, 1999. Submission of
a proposal does not guarantee inclusion of the proposal in the proxy statement
or its presentation at the meeting since shareholders must satisfy certain rules
under the federal securities laws.
AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Company is subject to the informational requirements of the
Exchange Act and files reports, proxy statements and other information with the
Commission. Those reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
Shareholders of the Company may obtain, without charge, copies of the
Company's most recent annual report, semi-annual report and quarterly report by
writing to the Company at 200 West Madison Street, Chicago, IL 60606, or by
calling (800) BKF-1891, or by accessing the Company's website at
www.bakerfentress.com.
July __, 1999
AVAILABLE INFORMATION
57
<PAGE>
APPENDIX A: Plan for Distribution of Assets for Baker, Fentress & Company
PLAN FOR DISTRIBUTION OF ASSETS
OF
BAKER, FENTRESS & COMPANY
WHEREAS, Baker, Fentress & Company (the "Company"), a Delaware
corporation, is a closed-end management investment company registered as such
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Company's investments consist of (i) a portfolio of
publicly traded securities (the "Public Portfolio") managed by John A. Levin &
Co. Inc. ("LEVCO") pursuant to a portfolio management agreement dated December
30, 1998 (the "Management Agreement") with the Company; (ii) certain private
placement investments (the "Private Portfolio"); (iii) shares of Levin
Management Co., Inc., a wholly-owned subsidiary of the Company and the parent
company of LEVCO; and (iv) shares of Consolidated-Tomoka Land Co. ("CTO"), a
majority-owned subsidiary of the Company; and
WHEREAS, the Board has determined that distribution to the Company's
shareholders, in cash or in kind, of substantially all the Company's assets
other than the Company's shares of Levin Management Co., Inc. is in the best
interests of the Company's shareholders;
WHEREAS, the Board has directed that this Plan be submitted to the
holders of the Company's outstanding shares of common stock for their approval
or disapproval at a special meeting of stockholders in accordance with the
requirements of the Delaware General Corporation Law (the "DGCL") and the
Company's Articles of Incorporation, as amended (the "Articles") and has
authorized the filing with the Securities and Exchange Commission (the
"Commission") and distribution of a proxy statement (the "Proxy Statement") in
connection with the solicitation of proxies for such meeting;
NOW, THEREFORE, the Board hereby adopts and sets forth this Plan for
Distribution of Assets of Baker, Fentress & Company as follows:
1. Effective Date of Plan. The effective date of this Plan (the
----------------------
"Effective Date") shall be the date on which this Plan is
approved by the stockholders of the Company in accordance with
the DGCL.
2. Private Portfolio. The officers of the Company shall continue
-----------------
their efforts to sell or otherwise liquidate the Company's
investments in its Private Portfolio, consisting of the
securities listed on Appendix A, at the date of adoption of
the Plan by the Board and as previously authorized by the
Board.
A-1
<PAGE>
3. Management of the Public Portfolio. From the date of adoption
----------------------------------
of the Plan by the Board through the Effective Date, the
Company's Public Portfolio shall continue to be managed by
LEVCO pursuant to the Company's existing investment objective,
policies and restrictions. After the Effective Date, LEVCO
shall cease to manage the Public Portfolio in accordance with
the Company's current investment objectives, restrictions and
policies and shall begin an orderly liquidation of the
securities held in the Public Portfolio pursuant to the Plan.
4. Management of Cash. Cash received from the sale of Public
------------------
Portfolio and Private Portfolio securities shall be managed by
the officers of the Company under the supervision of the Board
and shall not be part of the Public Portfolio subject to the
Management Agreement.
5. Sale or Liquidation of Assets. As of the Effective Date, the
-----------------------------
Company and LEVCO, under the supervision of the Board, shall
have the authority to, and as soon as practicable after the
Effective Date, but in no event later than December 31, 2000,
sell and liquidate the securities held in the Public Portfolio
and, to the maximum extent possible, the securities remaining
in the Company's Private Portfolio, and engage in such other
transactions as may be appropriate to the disposition of those
securities, including, without limitation, consummation of the
transactions described in the Proxy Statement.
6. Provisions for Liabilities. The Company shall pay or discharge
--------------------------
or set aside a reserve fund for, or otherwise provide for the
payment or discharge of, any liabilities and obligations,
including, without limitation, contingent liabilities.
7. Distribution of CTO Shares. The Company's shares of CTO shall
--------------------------
be distributed to the Company's shareholders upon such
specific terms, including record date, payment date and
provision for fractional shares, as the Board declares by
resolution.
8. Distributions to Stockholders. The net proceeds of the sales
-----------------------------
of securities as provided in paragraph 5 shall be distributed
to the Company's shareholders at such dates and times, to
shareholders of record at such dates and times, as the Board
declares by resolution.
9. Filings. As soon as practicable, the Company shall prepare and
-------
file Form N-8F under the 1940 Act and any other documents as
are necessary to effect the de-registration of the Company in
accordance with the 1940 Act and any other applicable
securities laws, and any rules and regulations of the
Commission.
A-2
<PAGE>
10. Expenses of the Sales and Distributions. The Company shall
---------------------------------------
bear all of the expenses incurred by it in carrying out this
Plan, including, but not limited to, all printing, legal,
investment banking, accounting, custodian and transfer agency
fees, and the expenses of any reports to, or meeting of,
stockholders whether or not the transactions contemplated by
this Plan are effected.
11. Amendment or Abandonment of Plan. The Board may modify or
--------------------------------
amend this Plan at any time without stockholder approval if it
determines that such action would be advisable and in the best
interests of the Company and its stockholders. If any
amendment or modification to this Plan appears necessary and
in the judgment of the Board will materially and adversely
affect the interests of the stockholders, such an amendment or
modification will be submitted to the stockholders for
approval. In addition, the Board may abandon this Plan without
stockholder approval at any time if it determines that
abandonment would be advisable and in the best interests of
the Company and its stockholders.
12. Powers of Board and Officers. The Board and the officers of
----------------------------
the Company are authorized to approve such changes to the
terms of any of the transactions referred to herein, to
interpret any of the provisions of this Plan, and to make,
execute and deliver such other agreements, conveyances,
assignments, transfers, certificates and other documents and
take such other action as the Board and the officers of the
Company deem necessary or desirable in order to carry out the
provisions of this Plan and effect the transactions described
in the Plan in accordance with the Code, the DGCL and any
rules and regulations of the U.S. Securities and Exchange
Commission, or any state securities commission, including,
without limitation, any Articles of Amendment, Articles
Supplementary, or other documents, and deregistering the
Company under the 1940 Act, as well as the preparation and
filing of any tax returns.
13. Appraisal rights. Stockholders will not be entitled to
----------------
appraisal rights under Delaware law in connection with the
Plan.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Plan to be executed by the Company as of this 17th day of June, 1999.
BAKER, FENTRESS & COMPANY
By: /s/ John A. Levin
------------------------
John A. Levin
President
A-3
<PAGE>
Appendix A
Citadel Communications
Paracelsus
Security Capital
Durolite
Durolite International Conv. Preferred
Durolite International Sub. Note
Durolite Europe Holdings Warrants
Durolite Europe Holdings Prom. Note
E-Sales
Golder, Thoma Cressey Fund II L.P.
Phillips Smith Spec. Retail Group L.P.
A-4
<PAGE>
APPENDIX B: Opinion of Lazard Freres & Co. LLC
May 6, 1999
The Board of Directors
Baker, Fentress & Company
200 West Madison Street
Suite 3510
Chicago, IL 60606
Dear Members of the Board:
We understand that Baker, Fentress & Company (the "Company") plans to
undertake a series of steps (taken together, the "Plan") intended by the Company
to address the persistent discount to net asset value represented by market
prices for the shares of common stock of the Company (the "Company Shares"). The
Plan is to comprise the following steps:
(i) liquidation of substantially all of the Company's portfolio of
public and private investments (other than majority-owned or
wholly-owned subsidiaries) (the "Liquidation Securities") and
distribution of the net proceeds to the Company's
shareholders;
(ii) distribution in-kind of the Company's approximately 79%
interest in Consolidated-Tomoka Land Company ("CTO") to the
Company's shareholders; and
(iii) termination of the Company's status as a registered investment
company under the Investment Company Act of 1940.
As a result of the Plan, we understand that each holder of a Company Share would
(a) receive a pro rata share of the cash proceeds of the Liquidation Securities;
(b) receive a pro rata share of the Company's holdings of CTO; and (c) retain
such Company Share. Following completion of these steps, we understand that the
Company would continue to exist as a non-investment company, engaged in the
provision of investment management services through Levin Management Co., Inc.
(with its subsidiaries, including John A. Levin & Co., Inc., the "Levco
Companies"), the stock of which is expected to be the Company's sole remaining
asset. We further understand that the liquidation of the Liquidation Securities
and subsequent distribution of cash proceeds, as well as the distribution
in-kind of the CTO investment would be a
B-1
<PAGE>
taxable event to the Company's shareholders, generating a tax liability
(ordinary income and short- and long-term capital gains) for the Company's
taxable shareholders.
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of Company Shares of the receipt of the
distribution of cash and securities as part of the Transaction, and the
retention of the Company Shares immediately following that distribution, taken
in the aggregate. In connection with this opinion, we have:
(i) held discussions with members of the Company's senior
management with respect to the financial terms and conditions
of the proposed Plan;
(ii) reviewed certain historical business and financial information
relating to each of the Company, CTO and the Levco Companies;
(iii) reviewed various financial forecasts and other data provided
to us by each of CTO and the Levco Companies relating to their
businesses;
(iv) held discussions with members of the senior managements of
each of the Company, CTO and the Levco Companies with respect
to past and current business operations and financial
condition, regulatory relationships, strategic objectives and
the future prospects of their respective companies;
(v) reviewed public information with respect to certain other
publicly-traded, closed-end, registered investment companies
and certain other publicly-traded investment management
companies;
(vi) reviewed the historical stock prices and trading volumes of
the Company Shares and CTO's common stock; and
(vii) conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the information
reviewed by us, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets, liabilities or solvency of the Company, including the assets,
liabilities or solvency of the Levco Companies. We also have assumed that all
Liquidation Securities, other than certain privately issued securities
identified by management (the "Exception Securities"), will be sold at prices
equal to the market prices in effect at April 30, 1999; with respect to the
Exception Securities, we have applied discounts to the asset values that have
been specified by management of the Company and assumed such Exception
Securities will be sold at such discounted values. With your approval, we also
have assumed that the distribution of the Company's investment in CTO to the
Company's shareholders will have no effect upon the market for CTO's securities.
With respect to financial
B-2
<PAGE>
forecasts, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of each of the Company, CTO and the Levco Companies. We
assume no responsibility for and express no view as to such forecasts or
valuations or the assumptions on which they are based.
Further, our opinion is necessarily based on economic, monetary, market
and other conditions as in effect on, and the information made available to us
as of, the date hereof. In that regard, we are expressing no opinion as to the
prices at which the securities of CTO or the Company will trade following
completion of the Plan.
In rendering our opinion, we have assumed that each shareholder of the
Company is subject to income tax at an effective combined state and federal rate
of 45% on ordinary income and short-term capital gains and 25% on long-term
capital gains. In addition, we have assumed that the Plan will not result in a
return of capital to any shareholder in excess of such shareholder's basis in
the Company Shares for income tax purposes.
In rendering our opinion, we have also assumed that the Plan will be
consummated on the terms described to us by the Company's management. We also
have assumed that obtaining the necessary regulatory approvals for the Plan will
not have an adverse effect on the Company or the Levco Companies.
Lazard Freres & Co. LLC is acting as investment banker to the Company
in connection with the Plan and will receive a fee for our services. We have in
the past provided investment banking services to the Company, including with
respect to the acquisition of the Levco Companies, for which we have been paid
customary fees.
Our opinion does not address the relative merits of the Plan as
compared to any alternative business transaction that might be available to the
Company.
Our engagement and the opinion expressed herein are provided for the
benefit of the Company's Board of Directors. Further, our opinion does not
constitute a recommendation as to how any holder of Company Shares should vote
with respect to the Plan. It is understood that this letter may not be disclosed
or otherwise referred to without our prior consent, except as may otherwise be
required by law or by a court of competent jurisdiction or as otherwise provided
for in our engagement letter.
B-3
<PAGE>
Based on and subject to the foregoing, we are of the opinion that the
receipt by the holders of Company Shares of the distribution of cash and
securities as part of the Plan, and the retention of the Company Shares by such
holders immediately following that distribution, taken in the aggregate, is fair
to holders of Company Shares from a financial point of view.
Very truly yours,
LAZARD FRERES & CO. LLC
By: /s/ Gary S. Shedlin
--------------------
Gary S. Shedlin
Managing Director
B-4
<PAGE>
APPENDIX C: Levin Management Co., Inc. Consolidated Financial
Statements
Levin Management Co., Inc. and Subsidiaries
Consolidated Financial Statements
Year ended December 31, 1997
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors....................................................................... C-2
Consolidated Balance Sheet........................................................................... C-3
Consolidated Statement of Income..................................................................... C-4
Consolidated Statement of Changes in Stockholder's Deficit........................................... C-5
Consolidated Statement of Cash Flows................................................................. C-6
Notes to Consolidated Financial Statements........................................................... C-7
Year ended December 31, 1998
Contents
Report of Independent Auditors....................................................................... C-12
Consolidated Balance Sheet........................................................................... C-13
Consolidated Statement of Income..................................................................... C-14
Consolidated Statement of Changes in Stockholder's Deficit........................................... C-15
Consolidated Statement of Cash Flows................................................................. C-16
Notes to Consolidated Financial Statements........................................................... C-17
</TABLE>
C-1
<PAGE>
Report of Independent Auditors
To the Stockholder of
Levin Management Co., Inc.
We have audited the accompanying consolidated balance sheet of Levin Management
Co., Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income, changes in stockholder's deficit and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Levin Management
Co., Inc. and Subsidiaries at December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
February 27, 1998
C-2
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
Assets
Current assets:
Cash and cash equivalents $ 8,122,000
Investment advisory fees receivable 8,057,000
Prepaid expenses 798,000
Receivable from broker 172,000
-----------
Total current assets 17,149,000
-----------
Investments in affiliated investment partnerships 4,219,000
Fixed assets (net of accumulated depreciation of $407,000) 657,000
Other assets 1,282,000
-----------
6,158,000
-----------
Total assets $ 23,307,000
===========
Liabilities and stockholder's deficit
Current liabilities:
Accrued expenses and accounts payable $ 697,000
Accrued bonuses 9,734,000
Income taxes payable, current 1,164,000
-----------
Total current liabilities 11,595,000
Term loan 65,000,000
-----------
Total liabilities 76,595,000
-----------
Stockholder's deficit:
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding -
Additional paid-in capital 55,517,000
Accumulated deficit (108,805,000)
-----------
Total stockholder's deficit (53,288,000)
-----------
Total liabilities and stockholder's deficit $ 23,307,000
===========
See notes to consolidated financial statements.
C-3
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Statement of Income
Year ended December 31, 1997
Revenues
Investment advisory fees $ 34,587,000
Incentive fees and general partner allocations 2,831,000
Commission income--net 1,385,000
Increase in equity in investments in limited partnerships 165,000
Interest 223,000
----------
Total revenues 39,191,000
----------
Expenses
Employee compensation and benefits 18,916,000
Communications and portfolio systems expense 466,000
Occupancy and equipment rental 846,000
Professional, legal and accounting fees 992,000
Promotional costs 556,000
Other operating expenses 1,214,000
----------
Total expenses 22,990,000
----------
Income before interest and taxes 16,201,000
Interest expense 6,484,000
----------
Income before taxes 9,717,000
Provision for taxes on income, current 4,523,000
==========
Net income $5,194,000
==========
See notes to consolidated financial statements.
C-4
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholder's Deficit
Year ended December 31, 1997
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficit
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ - $ 55,517,000 $(113,999,000) $ (58,482,000)
Net income - - 5,194,000 5,194,000
---------------------------------------------------------------------------
Balance at end of year $ - $ 55,517,000 $(108,805,000) $ (53,288,000)
===========================================================================
</TABLE>
See notes to consolidated financial statements.
C-5
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 5,194,000
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 267,000
Increase in investment advisory fees receivable (431,000)
Increase in prepaid expenses (585,000)
Increase in receivable from broker (77,000)
Decrease in investments in affiliated investment partnerships 222,000
Decrease in accrued expenses and accounts payable (190,000)
Increase in accrued bonuses 6,275,000
Increase in income taxes payable 689,000
------------
Net cash provided by operating activities 11,364,000
------------
Cash flows from investing activities
Increase in other assets (1,143,000)
Fixed asset additions (276,000)
------------
Net cash used in investing activities (1,419,000)
------------
Cash flows from financing activities
Repayment of note payable (3,000,000)
------------
Net increase in cash and cash equivalents 6,945,000
Cash and cash equivalents at the beginning of year 1,177,000
------------
Cash and cash equivalents at the end of year $ 8,122,000
============
Supplemental disclosure of cash flow information
Cash paid for interest $ 6,484,000
============
Cash paid for taxes $ 3,834,000
============
</TABLE>
See notes to consolidated financial statements.
C-6
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
The consolidated financial statements of Levin Management Co., Inc. (the
"Company") include its wholly-owned subsidiary (John A. Levin & Co., Inc.,
"LEVCO") and its two indirect subsidiaries (which are subsidiaries of LEVCO),
LEVCO GP Inc. ("LEVCO GP") and LEVCO Securities, Inc. ("LEVCO Securities"). All
intercompany transactions have been eliminated in consolidation.
LEVCO is an investment advisor registered under the Investment Advisers Act of
1940 which provides investment advisory services to its clients which include
U.S. and foreign corporations, mutual funds, limited partnerships, universities,
pension and profit sharing plans, individuals, trusts, not-for-profit
organizations and foundations. LEVCO Securities is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. LEVCO GP acts as the general
partner of four affiliated investment partnerships and is registered with the
Commodities Futures Trading Commission as a commodity pool operator.
The Company provides all administrative support services to its subsidiaries,
including, among other things, employee services, office space, equipment and
administrative support.
The Company is incorporated in the state of Delaware and is a wholly-owned
subsidiary of Baker, Fentress & Company ("BKF"), a closed-end fund listed on the
New York Stock Exchange.
All numerical information presented in the consolidated financial statements and
notes to the consolidated financial statements has been rounded to the nearest
thousand dollars.
Revenue Recognition
Generally, investment advisory fees are calculated quarterly, in arrears, and
are based upon a percentage of the market value of each account at the end of
the quarter. Incentive fees, general partner allocations of income earned from
affiliated investment partnerships and incentive fees from other accounts are
calculated at the end of their respective contract year.
C-7
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies (continued)
Commissions earned on securities transactions executed by LEVCO Securities, and
related expenses, are recorded on a trade-date basis.
Cash and Cash Equivalents
The Company treats all highly liquid instruments that mature within three months
as cash equivalents. At December 31, 1997, the Company maintained approximately
$1,130,000 in cash at two nationally recognized financial institutions and
approximately $6,992,000 in cash equivalents at one of the above nationally
recognized financial institutions.
Investments in Affiliated Investment Partnerships
Investments in affiliated investment partnerships are held through LEVCO GP and
are recorded based upon the equity method of accounting, which results in an
amount equal to the sum of LEVCO GP's capital accounts in the partnerships.
LEVCO GP is entitled to a special allocation of income from some of the
affiliated investment partnerships.
Income Tax
The Company files consolidated federal and combined state and local income tax
returns. The difference between the provision for income taxes and a provision
computed at the statutory federal tax rate is principally due to state and local
taxes.
The provision for federal, state and local income taxes included in the
consolidated statement of income consists of the following for the year ended
December 31, 1997:
Federal $ 2,791,000
State and local 1,732,000
==============
$ 4,523,000
==============
C-8
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Fixed Assets
Furniture, fixtures, office and computer equipment and leasehold improvements
are carried at cost. Depreciation of furniture, fixtures, office and computer
equipment is provided on the accelerated method over the estimated useful lives
of the respective assets. Leasehold improvements are amortized over the shorter
of the economic life or the term of the lease.
Other Assets
Included in other assets is a security deposit, approximately $1,021,000 at
December 31, 1997, required pursuant to the Company's office space lease
agreement. This deposit is held at a nationally recognized financial institution
in the Company's name.
2. Receivable from Clearing Broker
LEVCO Securities acts as an introducing broker and all transactions for its
customers are cleared through and carried by a major U.S. securities firm on a
fully disclosed basis. LEVCO Securities has agreed to indemnify its clearing
broker for losses that the clearing broker may sustain from the customer
accounts introduced by LEVCO Securities. In the event a customer is unable to
fulfill its contractual obligation to the clearing broker, LEVCO Securities may
be exposed to off-balance sheet risk.
C-9
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
3. Related Party Transactions
Term Loan and Other Borrowing from BKF
The Company has borrowed $65,000,000 under a term loan agreement with BKF. The
loan is due on or before June 28, 1999 and bears interest at an annual rate of
9.75%. The loan restricts the Company from entering into additional borrowing.
In June 1997, the Company repaid a note payable to BKF in the amount of
$3,000,000. For the year ended December 31, 1997, the Company incurred interest
expense of approximately $6,484,000 related to these borrowings.
Investment Advisory Fees from BKF
LEVCO manages the publicly traded portion of BKF's investment portfolio.
Advisory fees earned from this relationship for the year ended December 31, 1997
were approximately $1,530,000.
Investments in Affiliated Investment Partnerships and Related Revenue
The Company earned investment advisory fees and general partner allocations
(inclusive of an incentive fee) from affiliated investment partnerships of
approximately $1,477,000 and $2,343,000, respectively, for the year ended
December 31, 1997.
LEVCO GP has general partner liability with respect to its interest in each of
the affiliated investment partnerships and has no assets other than its interest
in these partnerships.
Commission Revenues
All commission revenues reflected on the consolidated statement of income have
been generated by transactions introduced to a clearing broker by LEVCO
Securities, which acts as a broker for certain investment advisory accounts of
the Company. Commission revenues have been presented net of the related clearing
expenses.
C-10
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
4. Commitment
The Company has office space obligations which require monthly payments plus
escalations through January 2008. This rental obligation is guaranteed by the
Company's wholly-owned subsidiary. The minimum annual rental commitments under
the operating lease are as follows:
1998 $ 909,000
1999 1,193,000
2000 1,244,000
2001 1,244,000
2002 1,264,000
Thereafter 7,269,000
============
Total minimum payments required $ 13,123,000
============
5. Net Capital Requirement
LEVCO Securities is subject to the Securities and Exchange Commission's Uniform
Net Capital Rule (Rule 15c3-1) (the "Rule"), which requires the maintenance of
minimum net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 8 to 1. At December 31, 1997, LEVCO
Securities was in compliance with the Rule.
6. Pension Plans
The Company maintains a target benefit pension plan covering all employees who
have reached the age of 20.5 and have completed nine months of service to the
Company. Contributions are made by the Company and are based on current
compensation. The Company incurred an expense of $295,000 related to
contributions to the plan for the year ended December 31, 1997.
The Company has also adopted a Section 401(k) plan. All employees with six
months or more of service to the Company are eligible to participate in the
plan. Eligible participants may contribute up to 15% of their earnings, subject
to statutory limitations. The Company may match employee contributions, up to
100%, subject to statutory limitations, and accordingly incurred an expense of
$213,000 related to contributions to the plan for the year ended December 31,
1997.
C-11
<PAGE>
Report of Independent Auditors
To the Stockholder of
Levin Management Co., Inc.
We have audited the accompanying consolidated balance sheet of Levin Management
Co., Inc. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of income, changes in stockholder's deficit and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Levin Management
Co., Inc. and Subsidiaries at December 31, 1998, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
February 12, 1999
C-12
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,849,000
Investment advisory fees receivable 9,296,000
Prepaid expenses 502,000
Receivable from broker 96,000
----------------
Total current assets 18,743,000
----------------
Investments in affiliated investment partnerships 4,883,000
Fixed assets (net of accumulated depreciation of $2,186,000) 2,987,000
Other assets 1,454,000
----------------
9,324,000
================
Total assets $ 28,067,000
================
Liabilities and stockholder's deficit Current liabilities:
Accrued expenses and accounts payable $ 1,376,000
Accrued bonuses 10,151,000
Income taxes payable, current 251,000
Loan payable--due June 28, 1999 65,000,000
----------------
Total current liabilities 76,778,000
Accrued rent 234,000
----------------
Total liabilities 77,012,000
----------------
Stockholder's deficit:
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding -
Additional paid-in capital 55,517,000
Accumulated deficit (104,462,000)
----------------
Total stockholder's deficit (48,945,000)
----------------
Total liabilities and stockholder's deficit $ 28,067,000
================
</TABLE>
See notes to consolidated financial statements.
C-13
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Statement of Income
Year ended December 31, 1998
<TABLE>
<S> <C>
Revenues
Investment advisory fees $ 35,453,000
Incentive fees and general partner allocations 4,371,000
Commission income--net 1,395,000
Increase in equity in investments in limited partnerships 160,000
Interest 351,000
----------------
Total revenues 41,730,000
----------------
Expenses
Employee compensation and benefits 21,984,000
Communications and portfolio systems expense 621,000
Occupancy and equipment rental 1,614,000
Professional, legal and accounting fees 939,000
Promotional costs 867,000
Other operating expenses 1,649,000
----------------
Total expenses 27,674,000
----------------
Income before interest and taxes 14,056,000
Interest expense 6,391,000
----------------
Income before taxes 7,665,000
Provision for taxes on income, current 3,322,000
================
Net income $ 4,343,000
================
</TABLE>
See notes to consolidated financial statements.
C-14
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholder's Deficit
Year ended December 31, 1998
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Stockholder's
Capital Deficit Deficit
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ - $55,517,000 $(108,805,000) $(53,288,000)
Net income - - 4,343,000 4,343,000
------------------------------------------------------------------------
Balance at end of year $ - $55,517,000 $(104,462,000) $(48,945,000)
========================================================================
</TABLE>
See notes to consolidated financial statements.
C-15
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year ended December 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net income $ 4,343,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 370,000
Increase in investment advisory fees receivable (1,239,000)
Decrease in prepaid expenses 296,000
Decrease in receivable from broker 76,000
Increase in investments in affiliated investment partnerships (664,000)
Increase in accrued expenses and accounts payable 913,000
Increase in accrued bonuses 417,000
Decrease in income taxes payable (913,000)
--------------
Net cash provided by operating activities 3,599,000
--------------
Cash flows from investing activities
Increase in other assets (172,000)
Fixed asset additions (2,700,000)
--------------
Net cash used in investing activities (2,872,000)
--------------
Net increase in cash and cash equivalents 727,000
Cash and cash equivalents at beginning of year 8,122,000
--------------
Cash and cash equivalents at end of year $ 8,849,000
==============
Supplemental disclosure of cash flow information
Cash paid for interest $ 6,391,000
==============
Cash paid for taxes $ 4,208,000
==============
</TABLE>
See notes to consolidated financial statements.
C-16
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
The consolidated financial statements of Levin Management Co., Inc. (the
"Company") include its wholly-owned subsidiary (John A. Levin & Co., Inc.,
"LEVCO") and its two indirect subsidiaries (which are subsidiaries of LEVCO),
LEVCO GP Inc. ("LEVCO GP") and LEVCO Securities, Inc. ("LEVCO Securities"). All
intercompany transactions have been eliminated in consolidation.
LEVCO is an investment advisor registered under the Investment Advisers Act of
1940 which provides investment advisory services to its clients which include
U.S. and foreign corporations, mutual funds, limited partnerships, universities,
pension and profit sharing plans, individuals, trusts, not-for-profit
organizations and foundations. LEVCO Securities is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. LEVCO GP acts as the general
partner of five affiliated investment partnerships and is registered with the
Commodities Futures Trading Commission as a commodity pool operator.
The Company provides all administrative support services to its subsidiaries,
including, among other things, employee services, office space, equipment and
administrative support.
The Company is incorporated in the state of Delaware and is a wholly-owned
subsidiary of Baker, Fentress & Company ("BKF"), a closed-end fund listed on the
New York Stock Exchange.
All numerical information presented in the consolidated financial statements and
notes to the consolidated financial statements has been rounded to the nearest
thousand dollars.
Revenue Recognition
Generally, investment advisory fees are calculated quarterly, in arrears, and
are based upon a percentage of the market value of each account at the end of
the quarter. Incentive fees, general partner allocations of income earned from
affiliated investment partnerships and incentive fees from other accounts are
calculated at the end of their respective contract year.
Commissions earned on securities transactions executed by LEVCO Securities, and
related expenses are recorded on a trade-date basis.
C-17
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company treats all highly liquid instruments that mature within three months
as cash equivalents. At December 31, 1998, the Company maintained substantially
all of its cash and equivalents at one nationally recognized financial
institution.
Investments in Affiliated Investment Partnerships
Investments in affiliated investment partnerships are held through LEVCO GP and
are recorded based upon the equity method of accounting, which results in an
amount equal to the sum of LEVCO GP's capital accounts in the partnerships.
LEVCO GP is entitled to a special allocation of income from some of the
affiliated investment partnerships.
Income Tax
The Company files consolidated federal and combined state and local income tax
returns. The difference between the provision for income taxes and a provision
computed at the statutory federal tax rate is principally due to state and local
taxes.
The provision for federal, state and local income taxes included in the
consolidated statement of income consists of the following for the year ended
December 31, 1998:
Federal $ 2,005,000
State and local 1,317,000
===========
$ 3,322,000
===========
C-18
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Fixed Assets
Furniture, fixtures, office and computer equipment and leasehold improvements
are carried at cost. Depreciation of furniture, fixtures, office and computer
equipment is provided on the accelerated method over the estimated useful lives
of the respective assets. Leasehold improvements are amortized over the shorter
of the economic life or the term of the lease.
Other Assets
Included in other assets is a security deposit, approximately $807,000 at
December 31, 1998, required pursuant to the Company's office space lease
agreement. This deposit is held at a nationally recognized financial institution
in the Company's name.
2. Receivable from Clearing Broker
LEVCO Securities acts as an introducing broker and all transactions for its
customers are cleared through and carried by a major U.S. securities firm on a
fully disclosed basis. LEVCO Securities has agreed to indemnify its clearing
broker for losses that the clearing broker may sustain from the customer
accounts introduced by LEVCO Securities. In the event a customer is unable to
fulfill its contractual obligation to the clearing broker, LEVCO Securities may
be exposed to off-balance sheet risk.
C-19
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
3. Related Party Transactions
Term Loan and Other Borrowing from BKF
The Company has borrowed $65,000,000 under a term loan agreement with BKF which
is due on or before June 28, 1999. The original loan had an interest rate of
9.75% per annum. The loan restricts the Company from entering into additional
borrowings and has certain covenant requirements including a fixed charge ratio
(as defined). For the quarter ended September 30, 1998, the Company was in
violation of the fixed charge covenant. In connection therewith, the Company
amended the loan agreement in which they received a waiver of the fixed charge
covenant through June 28, 1999 (the term of the loan). In return, the interest
rate on the loan was increased to 10.25% per annum.
Investment Advisory Fees from BKF
LEVCO manages the publicly traded portion of BKF's investment portfolio.
Advisory fees earned from this relationship for the year ended December 31, 1998
were approximately $1,525,000.
Investments in Affiliated Investment Partnerships and Related Revenue
The Company earned investment advisory fees and general partner allocations
(inclusive of an incentive fee) from affiliated investment partnerships of
approximately $1,088,000 and $2,846,000, respectively, for the year ended
December 31, 1998.
LEVCO GP has general partner liability with respect to its interest in each of
the affiliated investment partnerships and has no assets other than its interest
in these partnerships.
Commission Revenues
All commission revenues reflected on the consolidated statement of income have
been generated by transactions introduced to a clearing broker by LEVCO
Securities, which acts as a broker for certain investment advisory accounts of
the Company. Commission revenues have been presented net of the related clearing
expenses.
C-20
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
4. Commitment
The Company has office space obligations which require monthly payments plus
escalations through January 2008. This rental obligation is guaranteed by the
Company's wholly-owned subsidiary. The minimum annual rental commitments under
the operating lease are as follows:
1999 $ 1,193,000
2000 1,244,000
2001 1,244,000
2002 1,264,000
2003 1,324,000
Thereafter 5,945,000
===========
Total minimum payments required $12,214,000
===========
5. Net Capital Requirement
LEVCO Securities is subject to the Securities and Exchange Commission's Uniform
Net Capital Rule (Rule 15c3-1) (the "Rule"), which requires the maintenance of
minimum net capital and requires that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. At December 31, 1998, LEVCO
Securities was in compliance with the Rule.
6. Pension Plans
The Company maintains a target benefit pension plan covering all employees who
have reached the age of 20.5 and have completed nine months of service to the
Company. Contributions are made by the Company and are based on current
compensation. The Company incurred an expense of $264,000 related to
contributions to the plan for the year ended December 31, 1998.
The Company has also adopted a Section 401(k) plan. All employees with six
months or more of service to the Company are eligible to participate in the
plan. Eligible participants may contribute up to 15% of their earnings, subject
to statutory limitations. The Company may match employee contributions, up to
100%, subject to statutory limitations and, accordingly, incurred an expense of
$322,000 related to contributions to the plan for the year ended December 31,
1998.
C-21
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
7. Year 2000 (Unaudited)
The Company could be adversely affected if the computer systems used by the
Company and its service providers do not properly process and calculate
date-related information relating to the Year 2000. The Company is taking steps
that it believes are reasonably designed to address the Year 2000 problem with
respect to the computer systems it uses and to obtain satisfactory assurances
that comparable steps are being taken by each of the Company's other major
service providers. The Company does not expect to incur any significant costs in
order to address the Year 2000 problem. However, at this time, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Company.
C-22
<PAGE>
APPENDIX D: BAKER, FENTRESS & COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
A. Reorganization
The accompanying unaudited pro forma statements present the balance sheets of
Baker, Fentress & Company ("BKF"), which will become the holding company for
Levin Management Co., Inc. and its subsidiaries, and Levin Management Co., Inc.
and Subsidiaries ("Levco"), each on a pro forma basis. BKF will have no
operations and subsidiaries other than as a holding company. The Consolidating
Statement of Financial Condition presents, on a pro forma basis, the Company
adjusted for the liquidation of substantially all of its private and public
portfolios, the distribution of cash, the distribution of CTO and the recasting
of the June 1996 acquisition of Levco as a purchase, taking into account
intangible assets. The pro forma equity section has been adjusted to reflect the
proposed contribution to equity of $45,000,000 of the $65,000,000 intercompany
loan as well as the 6:1 reverse stock split anticipated as part of the Plan.
The Levin Management Co., Inc. and Subsidiaries pro forma Consolidated Statement
of Income presents the pro forma results of operations adjusted for the maximum
interest expense from the proposed third party loan to be used for the repayment
of a portion of the Levin Management/Baker Fentress loan, adjusted for the
Investment Management Fee income resulting from the liquidation of the BKF,
public portfolio and related receivables and adjusted for the amortization
expense on intangible assets based on the recasting of the June 1996 acquisition
of Levco as a purchase.
After completion of all distributions, expected to occur in January 2000, the
Company expects to deregister with the SEC as a registered investment company
and will become a regular operating company subject to corporate level income
taxes.
The Consolidated Statement of Income includes a pro forma adjustment for
additional income taxes, which would have been recorded if the Company had been
a "C" corporation for 1998 based on tax laws then in effect. Levco has operated
as a "C" corporation since its acquisition in June 1996.
The unaudited pro forma data gives effect to the lower management fee, reduction
in interest expense, and increase in operating expenses as if they had been in
effect at the beginning of the period. The pro forma adjustments also reflect
the income and expenses incurred in connection with the proposed transactions.
The results of all of these adjustments have been income tax effected.
The unaudited pro forma financial data does not purport to represent the results
of operations or the financial position of the Company, which actually would
have occurred, had the proposed transaction been previously consummated or
project the results of operations or the financial position of the Company for
any future date or period.
D-1
<PAGE>
Baker, Fentress & Company
Unaudited Pro Forma Statement of Financial Condition
(amounts in `000)
<TABLE>
<CAPTION>
Pro forma Pro forma
December 31, 1998 adjustments December 31, 1998
---------------------------- --------------------- ----------------------------
<S> <C> <C> <C>
Assets:
-------
Portfolio securities:
---------------------
Unaffiliated issuers $ 450,718 (c) $ (450,718) -
Controlled affiliates other than LEVCO 10,539 (c) (10,539) -
Investment in CTO 70,625 (c) (70,625) -
Investment in Levin Management 117,500 (b) (20,000) $ 76,036
(e) (21,464)
Non-controlled affiliates 57,940 (c) (57,940) -
------------------ -------------------
Total investments 707,322 76,036
------------------ -------------------
Cash and cash cash equivalents 67,331 (a) 1,912 5,800
(b) 15,000
(c) (78,443)
Receivables and other assets 2,591 (a) (2,591) -
------------------ -------------------
Total assets $ 777,244 $ 81,836
=================== ===================
Liabilities and stockholders' equity:
-----------------------------------
Bank borrowing $ 5,000 (b) $ (5,000) -
Accounts payable and accrued liabilities 922 (a) 4,873 $ 5,795
------------------ -------------------
Total liabilities 5,922 5,795
------------------ -------------------
------------------
Net assets $ 771,322
------------------
Common stock,$1 par value,authorized- 39,029 (d) (32,524) 6,505
60,000,000 shares; issued and outstanding-
39,029,101 shares; 6,504,850 shares proforma
Capital surplus-additional paid in capital 463,425 (c) (401,804) 69,536
(d) 32,524
(e) (24,609)
Undistributed net realized gains 9,766 (c) (9,766) -
Other retained earnings 48,057 (a) (5,553) -
(c) (42,504)
Unrealized appreciation of investments 211,045 (c) (214,190) -
(e) 3,145
------------------ -------------------
Total stockholders' equity 771,322 76,041
------------------ -------------------
------------------ -------------------
Total liabilities and stockholders' equity $ 777,244 $ 81,836
================== ===================
(a) -To reflect the collection of receivables,reversal of advisory fee payable to LEVCO ($127) and accrual costs in connection with
the proposed plan ($5,000).
(b) -To record the repayment of bank borrowing ($5,000), receipt of proposed partial loan repayment from LEVCO ($20,000) and
contribution of the remainder of the loan to LEVCO's equity ($45,000). BKF has not yet determined whether LEVCO will repay such
amount.
(c) -To record the distribution of the investment in CTO, the sale of the portfolio securities and distribution of the net proceeds.
(d) -To record the proposed reverse stock split (6,504,850 shares will be issued and outstanding after the reverse split).
(e) -To record the retroactive effect of accounting for the LEVCO transaction under purchase accounting.
</TABLE>
D-2
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Financial Conditions
(amounts in `000)
<TABLE>
<CAPTION>
Pro forma Pro forma
December 31, 1998 adjustments December 31, 1998
---------------------- ------------------- ----------------------
<S> <C> <C> <C>
Assets:
-------
Current assets:
--------------
Cash and cash equivalents $ 8,849 (b) $ 20,000 $ 8,849
(c) (20,000)
Investment advisory fees receivable 9,296 (a) (127) 9,169
Prepaid expenses and other current assets 598 598
------------------- -------------------
Total current assets 18,743 18,616
------------------- -------------------
Investments in affiliated partnerships 4,883 4,883
Fixed assets-net 2,987 2,987
Other assets 1,454 1,454
Intangible assets: -
-----------------
Goodwill (d) 23,721 23,721
Employment contracts (d) 23,721 23,721
Investment advisory agreements (d) 71,164 71,164
Accumulated amortization (d) (38,498} (38,498)
-
------------------- -------------------
Total assets $ 28,067 $ 108,048
=================== ===================
Liabilities and stockholder's equity (deficit):
---------------------------------------------
Current liabilities:
-------------------
Accrued expenses $ 1,376 $ 1,376
Accrued bonuses 10,151 10,151
Income taxes payable 251 251
Loan Payable-Baker, Fentress & Company 65,000 (e) $ (45,000) -
(c) (20,000)
------------------- -------------------
Total current liabilities 76,778 11,778
------------------- -------------------
Accrued rent 234 234
Loan payable (b) 20,000 20,000
------------------- -------------------
Total liabilities 77,012 32,012
------------------- -------------------
Stockholder's equity (deficit)
------------------------------
Common stock,$.01 par value: 1,000 shares authorized
issued and outstanding
Additional paid in capital 55,517 - 55,517
Retained earnings(Accumulated deficit) (104,462)(a) (127) 20,519
(e) 45,000
(d) 80,108
------------------- -------------------
Total stockholder's equity (deficit) (48,945) 76,036
------------------- -------------------
Total liabilities and stockholder's equity $ 28,067 $ 108,048
=================== ===================
(a) -To reverse advisory fee receivable from Baker, Fentress & Company ("BKF").
(b) -To record maximum amount of proposed loan from third party lender. BKF has not yet determined whether LEVCO will borrow any
such amount from a third party lender.
(c) -To record the maximum proposed repayment of a portion of the loan payable to BKF.
(d) -To record the initial acquisition by BKF under purchase accounting.
(e) -To record the maximum proposed contribution of the remainder of the loan payable to equity.
</TABLE>
D-3
<PAGE>
Baker, Fentress & Company and Subsidiary
Unaudited Pro Forma Consolidated Statement of Financial Condition
(amounts in `000)
<TABLE>
<CAPTION>
Pro forma Pro forma Pro forma
Baker,Fentress & Company Levin Management Co., Inc Intercompany Consolidated
December 31, 1998 December 31, 1998 elimination (a) December 31, 1
------------------------------- ------------------------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Assets:
- ------
Current assets:
- --------------
Cash and cash equivalents $ 5,800 $ 8,849 $ 14,649
Investment advisory fees receivable 9,169 9,169
Prepaid expenses and other current assets 598 598
------------------- ---------------- ----------------
Total current assets 5,800 18,616 24,416
------------------- ---------------- ----------------
Noncurrent assets:
- -----------------
Investments in affiliated partnerships 4,883 4,883
Fixed assets-net 2,987 2,987
Other assets 1,454 1,454
Intangible assets:
- -----------------
Goodwill 23,721 23,721
Employment contracts 23,721 23,721
Investment advisory agreements 71,164 71,164
Accumulated amortization (38,498) (38,498)
Investment in Levin Management 76,036 $ (76,036) -
------------------- ---------------- ----------------
Total assets $ 81,836 $ 108,048 $ 113,848
=================== ================ ================
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
- -------------------
Accrued expenses $ 5,795 $ 1,376 $ 7,171
Accrued bonuses 10,151 10,151
Income taxes payable 251 251
------------------- ---------------- ----------------
Total current liabilities 5,795 11,778 17,573
------------------- ---------------- ----------------
Accrued rent 234 234
Loan payable 20,000 20,000
------------------- ---------------- ----------------
Total liabilities 5,795 32,012 37,807
------------------- ---------------- ----------------
Stockholders' equity:
- --------------------
Common stock, $1 par value, authorized- 6,505 6,505
60,000,000 shares; issued and outstanding-
6,504,850 shares
Additional paid in capital 69,536 55,517 $ (76,036) 49,017
Retained earnings 20,519 20,519
------------------- ---------------- ----------------
Total stockholders' equity 76,041 76,036 76,041
------------------- ---------------- ----------------
------------------- ---------------- ----------------
Total liabilities and stockholders'
equity $ 81,836 $ 108,048 $ 113,848
=================== ================ ================
(a)-To eliminate the investment in Levin Management Co., Inc.
</TABLE>
D-4
<PAGE>
Levin Management Co., Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Income
(amounts in `000 except per share data)
<TABLE>
<CAPTION>
Pro forma
Year ended Year ended
December 31, Pro forma December 31,
1998 adjustments 1998
------------------- -------------- -----------------
<S> <C> <C> <C>
Revenues:
- --------
Investment advisory fees $ 35,453 (a) $ (1,525) $ 33,928
Incentive fees 4,531 - 4,531
Commission income - net 1,395 - 1,395
------------------- --------------------
Total revenues 41,379 39,854
------------------- --------------------
Expenses: - - -
- --------
Employee compensation and benefits 21,561 (a) (750) 20,811
Occupancy & equipment rental 1,614 - 1,614
Other operating expenses 4,499 1,408 5,907
------------------- --------------------
Total expenses 27,674 28,332
------------------- --------------------
Income before interest, taxes and amortization 13,705 (2,183) 11,522
Interest income (351) - (351)
Interest expense- BKF 6,391 (c) (6,391) -
Interest expense-bank loan - (d) 1,314 1,314
Amortization of intangibles - (e) 12,078 12,078
------------------- --------------------
Income (loss) before taxes 7,665 (1,519)
------------------- --------------------
Provision for income taxes 3,322 (f) 1,244 4,566
------------------- --------------------
Net income (loss) $ 4,343 $ (6,086)
=================== ====================
Net income per share:
Basic and diluted $ (0.94)(g)
====================
Weighted average shares outstanding- basic and diluted 6,504,850
====================
</TABLE>
(a)- To adjust the advisory fee for the revenue earned by LEVCO for
the management of the Baker, Fentress & Company ("BKF") public portfolio and
the corresponding reduction in employee bonuses.
(b)- To record additional operating expenses to be born by LEVCO which had
previously been born by BKF.
(c)- To reverse the interest paid to BKF on the loan, assuming that a portion
will be repaid ($20,000) and the remainder will be contributed to LEVCO's
capital ($45,000).
(d)- To record the maximum interest expense on the proposed $20,000 bank loan
from a third party lender; BFK has not yet determined whether LEVCO will borrow
such amount.
(e)- To record the amortization of the intangible assets which were recorded
under the original acquisition of LEVCO by BKF.
(f)- To record additional taxes for the pro forma adjustments.
(g)- Basis of calculation assumed that reverse stock split has occurred and the
pro forma number of shares outstanding.
D-5
<PAGE>
APPENDIX E: Examples of Financial and Tax Results
HYPOTHETICAL SHAREHOLDER TAX TREATMENT UNDER THE PLAN*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder basis in BKF stock $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 $22.00
Total cash and CTO Shares 18.48 18.48 18.48 18.48 18.48 18.48 18.48 18.48 18.48 18.48 18.48 18.48
distributed
Total gain/E&P distributed 8.92 8.92 8.92 8.92 8.92 8.92 8.92 8.92 8.92 8.92 8.92 8.92
Excess of distribution over 9.56 9.56 9.56 9.56 9.56 9.56 9.56 9.56 9.56 9.56 9.56 9.56
gain/E&P
Excess of distribution over 9.56 7.56 5.56 3.56 1.56 N/A N/A N/A N/A N/A N/A N/A
basis
Total tax from distributions 5.29 4.79 4.29 3.79 3.29 2.90 2.90 2.90 2.90 2.90 2.90 2.90
Basis in BKF stock after 0.00 0.00 0.00 0.00 0.00 0.44 2.44 4.44 6.44 8.44 10.44 12.44
distributions
Gain (loss) upon later sale 2.43 2.43 2.43 2.43 2.43 1.99 (0.01) (2.01) (4.01) (6.01) (8.01) (10.01)
</TABLE>
E-1
* See "FEDERAL INCOME TAX CONSEQUENCES" for assumptions on which these
calculations were based and other information.
<PAGE>
APPENDIX F: Proposed Charter Amendment
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
BAKER, FENTRESS & COMPANY
Baker, Fentress & Company, a corporation organized and existing under
the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY:
FIRST: That by unanimous vote of the Board of Directors of the
Company, resolutions were duly adopted setting forth a proposed
amendment to the Restated Certificate of Incorporation of the Company,
declaring such amendment to be advisable and calling a special meeting
of the stockholders of the Company for consideration thereof. The
resolutions setting forth the proposed amendment are as follows:
RESOLVED, that the Board of Directors deems it advisable and
in the best interest of the Company to reduce the number of
outstanding shares of common stock, par value $1.00 per share, of
the Company by effecting a reverse stock split of the Company's
outstanding shares of common stock by reclassifying each six (6)
shares of common stock held into one (1) share of common stock,
par value $1.00 per share; and
FURTHER RESOLVED, that the Board of Directors of the Company
hereby declares it advisable that the Restated Certificate of
Incorporation of the Company be amended by the deletion of
article fourth and the insertion of the following in lieu
thereof:
"FOURTH: The total number of shares of all stock which the
corporation shall have the authority to issue is 60,000,000
shares of common stock, $1 par value per share.
Immediately upon effectiveness of this amendment to the
Restated Certificate of Incorporation of the corporation pursuant
to the General Corporation Law of the State of Delaware (the
"Effective Date"), each six shares issued and outstanding
immediately prior thereto of the corporation's Common Stock, par
value $1.00 per share ("Old Common Stock"), shall automatically,
without further action on the part of the
F-1
<PAGE>
corporation or any holder of such Old Common Stock, be
reclassified into and become one issued and outstanding share of
the corporation's Common Stock, par value $1.00 per share ("New
Common Stock").
The reclassification of the Old Common Stock into New Common
Stock will be deemed to occur as of the Effective Date,
regardless of when the certificates previously representing such
shares of Old Common Stock are physically surrendered to the
corporation in exchange for certificates representing shares of
New Common Stock. From and after the Effective Date, certificates
previously representing shares of Old Common Stock are hereby
canceled and shall, until such certificates are surrendered to
the corporation in exchange for certificates representing shares
of New Common Stock, represent the number and class of shares of
New Common Stock into which such shares of Old Common Stock shall
have been reclassified pursuant to this amendment; provided,
however, that no dividends or distributions shall be received by
a person holding shares of New Common Stock until the
certificates previously representing shares of Old Common Stock
have been so surrendered for exchange.
In any case in which the reclassification of shares of Old
Common Stock into shares of New Common Stock would otherwise
result in any stockholder holding a fractional share, the
corporation shall, in lieu of issuing any such fractional share,
pay the stockholder for such fractional share on the basis of the
average closing market price on the New York Stock Exchange of
the New Common Stock for the ten (10) trading days immediately
following the Effective Date."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of the Company was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary
number of shares as required by statute were voted in favor of the
amendment.
THIRD: That said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State
of Delaware.
FOURTH: That said amendment shall be effective on the date this
Certificate of Amendment is filed and accepted by the Secretary of State of
the State of Delaware.
F-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed by James P. Gorter, its Chairman, this ___ day of January 2000.
BAKER, FENTRESS &COMPANY
By: _____________________________
James P. Gorter, Chairman
F-3
<PAGE>
PROXY BAKER, FENTRESS & COMPANY PROXY
Proxy Solicited By The Board Of Directors
For The Special Meeting of Shareholders - August 19, 1999
Frederick S. Addy, David D. Grumhaus and Jeffrey A. Kigner, or any of them, each
with the power of substitution and revocation, are hereby authorized to
represent the undersigned, with all powers which the undersigned would possess
if personally present, to vote the Company Shares of the undersigned at the
special meeting of shareholders of BAKER, FENTRESS & COMPANY to be held at the
Chicago Hilton & Tower, 720 South Michigan Avenue, Chicago, IL 60605, on
Thursday, August 19, 1999, at 10:30 a.m., local time, and at any postponements
or adjournments of that meeting, as set forth below, and in their discretion
upon any other business that may properly come before the meeting.
Please indicate change of address here and mark the
box on the other side.
____________________________________________________
____________________________________________________
All capitalized terms
used in this proxy shall
have the same meanings
assigned to them in the
Proxy Statement. ____________________________________________________
(Continued and to be signed on reverse side.)
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
YOUR VOTE IS IMPORTANT.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED POSTMARKED ENVELOPE.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Please mark X
your vote as -
indicated in
this example
The Board of Directors recommends that you vote FOR the proposals below.
1. To approve the Plan For Distribution of 2. To amend Baker, Fentress &
Assets of Baker, Fentress & Company. Company's Certificate of Incorporation
to provide for a reverse stock split.
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN Check here if you plan to attend the
_____ _______ _______ _____ _______ _______ meeting. ______
Check here for address change. ______
This proxy will be voted as specified or,
if no choice is specified, will be voted
FOR the proposals specified herein.
Please sign exactly as your name appears.
If acting as attorney, executor, trustee,
or in representative capacity, sign name
and indicate title.
Dated: _________________, 1999
__________________________________________
Signature(s)
Please vote, sign, date and return this
proxy card promptly using the enclosed
envelope.
</TABLE>
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
[MAP OF LOCATION OF MEETING]
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Future Investment
Performance" and to the use of our reports dated February 27, 1998 and February
12, 1999, included in the Proxy Statement of Baker, Fentress & Company.
Ernst &
Young LLP
New York, New York
June 23, 1999
